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January 2019 Edition V.
“Crypto Winter Edition”
Demelza Kelso Hays
Mark J. Valek
Custody Solutions for Cryptocurrencies
Securitization or Tokenization?
Could a Bitcoin Standard work?
www.cryptofunds.li
We would like to express our profound gratitude to our premium
partners for supporting the Crypto Research Report:
Contents
Editorial ................................................................................................................................................................................. 4
In Case You Were Sleeping: Crypto Winter Edition ............................................................................................................ 6
The Crash and the Consequences ...................................................................................................................................... 7
Asset Class and Adoption ................................................................................................................................................. 11
M&As and Europe ............................................................................................................................................................. 14
Central Banks and Stablecoins ......................................................................................................................................... 15
ICO-Bust and Outlook ....................................................................................................................................................... 19
Crypto Concepts: Custody Solutions for Crypto Currencies .......................................................................................... 22
Not All Institutional Storage Solutions Are Made Equal ..................................................................................................... 23
Crypto Storage AG ............................................................................................................................................................ 24
Card Wallet ....................................................................................................................................................................... 27
Daenerys & Co. ................................................................................................................................................................ 28
Blockvault ......................................................................................................................................................................... 30
Swiss Crypto Vault AG ...................................................................................................................................................... 31
HSMs Matter and Outlook ................................................................................................................................................. 33
A Bitcoin Standard? Saifedean Ammous Musing with the Crypto Research Report ..................................................... 35
Bitcoin’s Stock-to-Flow Ratio is Lower Than Gold’s ........................................................................................................... 36
Taming Bitcoin’s Volatility?................................................................................................................................................ 37
Can a Deflationary Monetary System Work? ..................................................................................................................... 39
The Current Monetary System is Debt-Based ................................................................................................................... 39
A Free Market for Money .................................................................................................................................................. 42
Bitcoin: Two Paths to Monetization ................................................................................................................................... 43
Institutional Requirements for an Investible Crypto Index .............................................................................................. 45
Creating a Benchmark for a Premature Market ................................................................................................................. 46
The Creation of the LIMEYARD Cryptoasset Index (LYCAI) .............................................................................................. 47
Incrementum Investible Cryptoasset Index ........................................................................................................................ 48
Final Remarks ................................................................................................................................................................... 49
Equity Tokens ..................................................................................................................................................................... 50
Institutional Money-Steering Innovation ............................................................................................................................. 51
Define Token and Security ................................................................................................................................................ 52
Should I Tokenize or Securitize or Both? .......................................................................................................................... 53
Legal Challenges for Blockchain-Based Capital Markets ................................................................................................ 58
Capital Flows to the US ..................................................................................................................................................... 59
Classification of Tokens as Securities ............................................................................................................................... 60
Primary Market: Issuance of Security Tokens ................................................................................................................... 62
Secondary Markets: Trading in Security Tokens ............................................................................................................... 63
Final Remarks ................................................................................................................................................................... 64
Disclaimer:
This publication is for information purposes only and represents neither investment advice, nor an investment analysis or an invitation to buy or
sell financial instruments. Specifically, the document does not serve as a substitute for individual investment or other advice. The statements
contained in this publication are based on the knowledge as of the time of preparation and are subject to change at any time without further
notice. The authors have exercised the greatest possible care in the selection of the information sources employed, however, they do not
accept any responsibility (and neither does Incrementum AG) for the correctness, completeness, or timeliness of the information, respectively
the information sources made available, as well as any liabilities or damages, irrespective of their nature, that may result therefrom (including
consequential or indirect damages, loss of prospective profits or the accuracy of prepared forecasts).
Copyright: 2019 Incrementum AG. All rights reserved.
Editorial
Dear Reader,
The end of the year is always a good time to look back and contemplate what
lessons we can learn for the New Year. During 2018, the Crypto Research Report
covered regulation in the US and in Europe and provided insights on various
crypto concepts like smart contracts, hard forks, and consensus mechanisms. In
terms of market action, we offered a somewhat critical view. In the inaugural
edition of December 2017, we dedicated a chapter on ICOs, called “ICOs. Scams
and Big Hopes”. Obviously, we were quite critical towards the ICO-bonanza. 12
months later we feel very vindicated in our opinion, as many ICOs have failed. In
our March edition, we featured an article on technical analysis called “Is a Crypto
Winter About to Start?” The author, Florian Grummes, nailed it when he pointed
out that there was a good chance that we would see $4,500 to $5,200 by summer.
Figure 1: March Forecast of Bitcoin Downwards
In our October edition, we presented a valuation methodology based on our
quantitative network effect. It also suggested that Bitcoin, and several other coins
were still overvalued. However, on a critical note to a piece of content, we would
like to state the following: In Figure 9 of the June edition of the Crypto Research
Report, we plotted cryptocurrency consensus mechanisms according to their
degree of centralization and external trust anchor. However, recent research by the
International Organization for Standardization (ISO) provides a more elegant
method for classifying consensus or governance mechanisms. Simply put, a
public blockchain means anyone can read. A permissionless
blockchain means anyone can write. Cryptocurrencies such as Byteball Bytes
and XRP have a transparent ledger of transactions that can be viewed publicly;
however, validation or witnessing can only be done by authorized nodes. Privacy
Source: Midas Touch, Incrementum AG
5
Twitter: @CryptoManagers
coins that have opaque blockchains, such as Monero and ZCash, fall in the
opposite category, private and permissionless.
Table 1: Concensus Mechanism Classification
Permissioned Permissionless
Public Ripple/IOTA/Byteball Bitcoin
Private Hyperledger Privacy coins
A formal definition of “blockchain” is also starting to convalesce in the academic
literature. A blockchain is a distributed ledger database that has a
consensus mechanism. Therefore, distributed ledger technologies (DLT) are
the broad category of peer-to-peer database structures and DLTs include
Hyperledger, Bitcoin’s blockchain, and IOTA’s directed acyclic graph.
Figure 2: October’s Forecast of Bitcoin Downwards
Source: Coinmetrics; Incrementum AG.
Winter is the perfect season of the year to cuddle up at home and do some research
on cryptocurrencies. This edition of the report covers institutional grade
storage solutions, security token offerings, a real cryptocurrency index
that considers liquidity and regulations, and an exclusive interview
with Saifedean Ammous. With this, we send you cordial season greetings and
hope you enjoy our January Edition of the Crypto Research Report.
Demelza Kelso Hays and Mark Valek
Incrementum AG
In Case You Were
Sleeping:
Crypto Winter Edition
“The idea of having an alternative to traditional fiat money is attractive, especially today, when major
currencies’ savings value is in jeopardy and the trust they require to work is declining. Central banks are no longer focused on their duty to protect money’s value and have instead bowed to the pressure spendthrift governments have put on them to finance oversized
public debts.”
Princess Gisela von und zu Liechtenstein
Key Takeaways
Gross profit margins on mining Bitcoin and Ethereum have fallen to 30% and 15% respectively.
Never the less Bitcoin will not enter a “death spiral” as some critics have proposed. Enough
miners are incentivized to stay in the market as the difficulty falls.
The rumor that Goldman Sachs’ crypto trading desk was cancelled is “fake news.” Not only is
Goldman launching a trading desk, they are also working on a digital asset custody solution.
Due to the recent high volatility in the crypto markets demand for stable coins has increased.
Various interesting projects are being worked on right now.
7
Twitter: @CryptoManagers
Crypto-winter is in full swing. In the background, the major
players are working on the infrastructure while the authorities
are clearing up the debris of the ICO hype.
About ten years after the publication of the famous white paper by Satoshi
Nakamoto, almost everything has been said about Bitcoin's anniversary. Therefore,
our greetings do not go to the mysterious inventor or inventors of the
cryptocurrency, but to Alicia Florrick. The likeable (and fictional) lawyer from the
CBS hit series "The Good Wife" had already dealt with a Bitcoin case in 2012. It
was probably the very first Bitcoin reference in a mainstream television show.
The scriptwriters deserve praise. Not only because they made Bitcoin an issue
when the cryptocurrency was worth just three dollars apiece. But also,
because they could explain this new innovation within a few minutes. The
viewers were not only entertained, but also well informed when Alicia's teenage
children taught her about Bitcoin step by step. Something that others have often
failed to replicate when it comes to Bitcoin.
When the Simpsons mentioned Bitcoin a year later, it was – of course – in the way
of a joke (S25E07). The protagonist in this case was Krusty the Clown. Lisa
Simpson asked Krusty if he was broke, and he answered: "Yeah, all it takes is some
bad luck at the ponies, worse luck in the bitcoin market, and heavy investment in a
high-end bookmark company." This rather depressive perspective fits in well with
Bitcoin's past anniversary year.
As far as prices were concerned, 2018 was virtually the opposite of
2017. After the euphoria came disillusionment. After the boom came the bust.
$20,000 was followed by $10,000. Then the $6,000 mark was held for a long
time. Until the end of November. Then it went rapidly down – triggered by a
dispute in the Bitcoin Cash Community. Bitcoin slipped into the $3,000 area. The
media published obituaries. Like so many times before. Explanations of what
Bitcoin actually is are no longer necessary. Bitcoin has actually arrived in the
mainstream. It was a long way. The colleagues from "Breaker Magazine" have
compiled a whole list of Bitcoin references in pop culture from the past ten years.
They ask, "What does Bitcoin in the mainstream actually mean?” Is it about the
price? Is it about using the cryptocurrency in the coffee house? Or is it about fame?
We also ask ourselves these questions.1
The Crash and the Consequences
Since Bitcoin was first mentioned in "The Good Wife", the price has risen by more
than 10,000 percent. The first ten years of the cryptocurrency are actually an
incredible success story.
—
1 https://breakermag.com/a-comprehensive-list-of-crypto-references-in-pop-culture/
Source: David M. Russel/CBS
8
Twitter: @CryptoManagers
But all this does not seem to interest anyone after the depressing year 2018.
Bitcoin had to celebrate his birthday with a tear in his eye. Recently, there has even
been debate about a death spiral. Some argue that miners will simply stop
their activities if the price falls below the cost of production.
"Once Bitcoin’s price falls below its cost of mining, the incentive to mine will
deteriorate, thrusting bitcoin into a death spiral. That is, without the mining
activities supporting the ledger that maintains the records of who owns what
— bitcoin is, after all, a set of encrypted numbers that cannot establish the
ownership of anything — bitcoin will become worthless."2
Atulya Sarin
This view of things is not new. The same debate has been going on since 2011.
Today, the industry is much bigger, but the answer to the scaremongering remains
the same. As then, the prophets of Bitcoin's death overlook the nuances in the
game theory behind the cryptocurrency. Satoshi Nakamoto prepared the network
very well for a rapid drop in prices. After 2016 blocks, the difficulty is
adjusted. If the price drops and the number of miners shrinks, the software is
designed to make mining easier for the remaining miners. The argument of the
death spiral is based on the assumption that the price could fall so quickly that the
system does not adjust difficulty in time - and the miners give up. But there are
solutions for this problem. Andreas Antonopoulos explains:
"If the miners wait until the difficulty retargets and the difficulty becomes
less, then each miner who waits makes more profit because in the new scheme
they have a greater percentage of the mining power than they did before."3
In addition, one must consider: Mining costs are not the same everywhere, each
miner has his or her own calculations. Some might even be able to temporarily
mine at a loss. And if all else fails, there is still the option of a hard fork, which
would allow the immediate adjustment of the difficulty. That would be the last
resort.4
Of course, this does not mean that all miners did survive the fall in prices
unscathed. The situation is quite dramatic. Bitcoin miners are used to huge gross
profit margins of up to 50 percent. Since the fall in prices, the situation has become
tougher, as BitMEX has calculated. Currently, profit margins are only 30
percent for Bitcoin and 15 percent for Ethereum. There are also a number
of mining companies that have misjudged the situation and already went
bankrupt. The cleansing of the market during the price decline does not only apply
—
2 https://www.marketwatch.com/story/bitcoin-is-close-to-becoming-worthless-2018-12-03 3 https://www.marketwatch.com/story/why-bitcoin-by-design-wont-become-worthless-according-to-this-crypto-
heavyweight-2018-12-05?mod=newsviewer_click 4 https://www.theblockcrypto.com/2018/12/04/the-bitcoin-mining-death-spiral-debate-explained/
“The blockchain is a distributed
network that solves all the
problems that we have of
finance, but more broadly, it’s
like a philosophy. It’s a way of
life.”
Mike Cernovich
9
Twitter: @CryptoManagers
to crypto projects, but also to the mining sector.5 The CIO of BlockTower Capital,
Ari Paul, explained on Episode 95 of Laura Shin’s Unchained podcast that mining
as an industry is not profitable because miners compete with each other in a zero-
sum game.6
And when it comes to Bitcoin as a currency, things look even grimmer. Around
Bitcoin’s 10th birthday in October, plenty of experts lampooned Bitcoin’s
irrelevance as a means of payment.
"In 2018, cryptocurrencies in general have sharply limited relevance, if any,
to the way that money is moved around the world. Bitcoin is an
undoubtedly valuable commodity and is by far the highest-profile
and most important of the cryptocurrencies, but it is not actually a
currency in any real sense. It is used for some payments, mostly peer-to-peer,
between parties for whom the anonymity of Bitcoin is important, or between
the remaining true believers in the global potential of the system."7
Samuel Murrant, GlobalData's payment analyst
But that's a very one-dimensional view of Bitcoin – and Murrant knows it too. He
follows up: "Bitcoin is far more like gold than it is like money – it is a store of
value, considered precious due to its rarity, and traded among investors to profit
from changes in its perceived value over time."
Bitcoin has therefore created its own asset class: crypto. The fact that a bubble
burst at the beginning of the year cannot be denied. Air is still escaping. In our very
first report in December 2017, we warned of the ICO boom and its consequences.
In the March issue of this year we wrote an article entitled "Is there a crypto winter
threatening us?” Currently, the northern hemisphere is not only in a
meteorological winter, but globally we are seeing the second deepest crypto-
winter after the bear market of 2014 and 2015. This adjustment may have
run its course, although that’s too early to call.
From an economic point of view, this is positive: after a bubble, only a
crash can lay the foundation for new, sustainable growth. Unfortunately,
however, crypto, which Morgan Stanley now also sees as an "institutional asset
class", is so young that we have little experience of how long such an adjustment
could take.8 We can only wait and see how the big players position themselves for
the next phase. And, as we have been documenting regularly for more than a year,
there is a hell of a lot going on.
—
5 https://blog.bitmex.com/the-price-crash-the-impact-on-miners/6 http://unchained.forbes.libsynpro.com/ari-paul-on-why-bitcoin-is-a-good-value-buy-today-ep957 https://www.globaldata.com/ten-years-bitcoin-now-no-relevance-payments-says-globaldata/8 https://www.coindesk.com/morgan-stanley-says-crypto-is-a-new-institutional-asset-class/
"To raise equity, an Initial Coin
Offering, or ICO, system was
developed. This uses the
blockchain technology to replace
the stock market, and effectively
decentralizes its function of
supplying capital to the
economy."
Princess Gisela von und zu
Liechtenstein
10
Twitter: @CryptoManagers
The second sector, where Bitcoin and blockchain have undoubtedly
innovated, is payment traffic and the area of currencies in general. Not
necessarily because Bitcoin has asserted itself as a means of payment. We know
that didn't happen. The real breakthrough is mainstream acceptance of digital
currencies per se and "private" digital currencies in general. So much is happening
here that even the central banks can no longer just idly watch. In a digital world,
cryptocurrencies, and privately issued stablecoins in particular, offer an alternative
to the Euro, Dollar or Pound.
Figure 3: 2018’s Negative Return of 70% Requires Gain of 233%.
Source: Incrementum
Bitcoin has also significantly influenced a third sector: cybercrime.
Unfortunately, Bitcoin's second appearance on "The Good Wife" in 2013 was
already about a ransomware extortion. The good news: Supervisory authorities are
cracking down on fraud in crypto. From our point of view, this is very positive for
the sector. 2018 may have been depressing in terms of prices, but this leads to an
automatic market cleansing, and it gives the cops time to hunt scammers. The SEC
even punished celebrities for advertising scamcoins for the first time. More about
that later.
“Trust is established through
mass collaboration and clever
code rather than by powerful
intermediaries like governments
and banks.”
Don Tapscott,
author of The Digital Economy,
Wikinomics
11
Twitter: @CryptoManagers
Asset Class and Adoption
As Michael Novogratz, one of the best-known crypto investors, puts it: "One thing
you learn in this process is that everything takes a little longer than you hoped it
would." We won't see the $10,000 mark again this year, the Bitcoin bull
recently said. His company, Galaxy Digital Holdings, has already posted more than
$150 million in losses this year. But Novogratz, one of Wall Street's best-known
Bitcoin supporters, won't give up.9 On the contrary: Novogratz, himself a former
Goldman Sachs partner, recently invested in BitGo Holdings – together with the
investment bank. Goldman and Galaxy Digital Ventures hope that the start-up will
provide a solution to the still unsolved problem of custodianship of cryptoassets.
US regulators require money managers to store assets in so-called "qualified
custodians". The traditional players in this sector have so far stayed away from the
crypto market for fear of hackers and the legal uncertainty that still prevails.10
Figure 4: Timeline of Famous Hacks.
Source: Incrementum
"If you were investing in any other asset class, you’re probably not worried about
the asset just disappearing – but this one, people still have that fear," said Mike
Belshe, BitGo's co-founder and CEO in an interview with Bloomberg. His company
has now collected around $70 million through fundraising. The Palo Alto-based
company was founded in 2013 and offers digital wallets that require multiple
signatures for transactions. Offline safes for Bitcoin and other currencies are also
—
9 https://www.bloomberg.com/news/articles/2018-10-15/novogratz-says-bitcoin-rally-likely-to-take-place-next-year 10 https://www.bloomberg.com/news/articles/2018-10-18/goldman-wades-deeper-in-crypto-betting-on-bitgo-with-
novogratz
12
Twitter: @CryptoManagers
available. The company currently manages 75 different cryptoassets and
a total volume of around $2 billion dollars. But the entry of Novogratz and
Goldman could take BitGo to a whole new level.
Goldman is certainly one of the most courageous banks on Wall Street when it
comes to Bitcoin. "We believe that a custody offering is a logical precursor to
digital asset market making," said Goldman spokesman Michael DuVally. Reports
that Goldman has cancelled its plans for its own crypto trading desk in view of the
price drop have led the bank to deny this as "fake news". Allegedly Goldman is
also working on their own solution for Bitcoin custodianship. One thing is certain:
as long as these questions have not been clarified, the crypto market will
remain closed both to the "normal" retail investor and to almost all
institutional investors. In this issue we dedicate an entire chapter to safe
custody solutions that already exist or are going live soon.
Another important player who wants to compete against Goldman in this area is
Fidelity Investments. The company, which manages $7.2 trillion in
customer funds in its traditional business, established its own crypto
subsidiary in October. Under the name Fidelity Digital Asset Services,
customers will be able to trade Bitcoin on various stock exchanges at the best
prices. Cold storage, i.e. safe storage without an internet connection, could be part
of the package right from the start.11
"If you look at the existing market infrastructure, it’s heavily skewed toward
the needs of retail investors and early adopters of the space. The time is quite
good for this announcement. We’ve seen a real acceleration of demand over
the last couple months."
Tom Jessop of Fidelity
Fidelity has been experimenting with Bitcoin since 2014, and they have even
mined hundreds of Bitcoins. In the Fidelity canteen you can now pay with Bitcoin.
"The question is, how do we stay ahead of the competition? How do we innovate
and bring new products onto the platform?" asks Jessop.
It is by no means the case that all institutional investors are merely sitting on the
sidelines and waiting. In fact, institutional investors may have replaced high net
worth individuals as the largest buyers of cryptocurrencies. These trades usually
take place directly between investors and large miners or people with large Bitcoin
fortunes. According to current estimates, this over-the-counter (OTC) market
sees a daily volume of $250 million to $30 billion dollars.12 For
comparison: According to "coinmarketcap.com", cryptoassets worth around $15
—
11 http://fortune.com/2018/10/15/fidelity-launches-company-help-hedge-funds-big-investors-trade-crypto/ 12 https://www.bloomberg.com/news/articles/2018-10-01/institutional-investors-are-using-back-door-for-crypto-
purchases
“The blockchain does one thing:
It replaces third-party trust with
mathematical proof that
something happened.”
Adam Draper
13
Twitter: @CryptoManagers
billion are traded daily on the exchanges. Some of the stock exchanges listed there
are however not considered to be very reputable and their figures should be viewed
with skepticism. At the University of Liechtenstein, a comprehensive analysis is
currently being carried out on this subject, which deals with the actual market
depth of the asset class. The results of the study will certainly be a topic in one of
our next issues.
There is no doubt that the OTC market has also suffered from the price decline.
Nevertheless, growth can be observed here, says Jeremy Allair, CEO of Circle
Internet Financial in Boston: "We’ve seen triple-digit growth enrolling in
our OTC business. That’s a big growth area." This growth is likely to
continue as long as institutional investors enter the market. Because they often
need more coins than are offered on the exchanges. Or they are afraid of moving
the price too far by buying or selling big amounts. That's why they look for trading
partners.
None of this is hidden from the big Wall Street banks. We've heard about Goldman
and Fidelity. But it looks like Fear of Loss (FOL) is quickly transitioning
to Fear of Missing Out (FOMO). Morgan Stanley, Citigroup and Bank of
America Merrill Lynch are also reportedly working on their own Bitcoin products
to meet customer demand.13 Russia's Gazprombank is also venturing into the
market via a subsidiary in Switzerland.14
And then there are the big US universities that manage their income and donations
in endowments. 96 percent of university money managers still say they
don't want to touch the crypto market. In a recent interview with Mark
Yusko, we discussed university investments in cryptocurrencies because some of
the big names like Harvard, Stanford and MIT are already in business.15 The same
goes for Yale. The elite school recently invested in the Paradigm Fund, which was
launched by former employees of Coinbase, Sequoia Capital and the Pantera
Capital crypto fund. A total of around $400 million is invested in this fund.
However, it is not known how much of this comes from Yale's $30-billion-dollar
purse. But the step is significant, because Yale's money is managed by David
Swensen.16 Swensen is considered a pioneer among institutional investors and has
managed some of the best performing college endowments over the past decades.
He focuses on long time horizons and often on markets with low liquidity assets.
Many other universities try to imitate him. Under Swensen, Yale has seen a return
of almost 12 percent annually - over the past 20 years. In total, more than $500
billion dollars are invested in the funds of US colleges.17
—
13 https://bitcoinexchangeguide.com/breaking-bank-of-americas-merrill-lynch-to-launch-bitcoin-trading-product-to-
rival-goldman-sachs-and-morgan-stanley/ 14 https://gazprombank.ch/news/gazprombank-switzerland-ltd-prepare 15 https://www.theinformation.com/articles/harvard-stanford-mit-endowments-invest-in-crypto-funds 16: https://www.incrementum.li/journal/advisory-board-discussion-q4-2018-blockchain-technology-the-biggest-
wealth-creation-opportunity-of-our-lifetime-feat-special-guest-mark-yusko/ 17 https://www.bloomberg.com/news/articles/2018-10-05/yale-is-said-to-invest-in-crypto-fund-that-raised-400-million
“This is the missing piece for
infrastructure — it’s a
treacherous environment today.
Hedge funds need it, family
offices need it, they can’t
participate in digital currency
until they have a place to store it
that’s regulated […] This is early
stages in an industry that’s
volatile right now. We’re in a
down cycle in terms of where
we’re going, but the institutions
see an opportunity. It’s going to
progress quickly.”
Mike Belshe,
co-founder and CEO of BitGo
14
Twitter: @CryptoManagers
Two important players have recently underlined their interest in the crypto market
but have adjusted their schedule to the new pricing conditions. Bakkt, the crypto
platform of Intercontinental Exchange (ICE), has postponed the launch of its own
Bitcoin futures until the end of January. "As is often true with product launches,
there are new processes, risks and mitigates to test and re-test, and in the case of
crypto, a new asset class to which these resources are being applied", said Bakkt
CEO Kelly Loeffler. The partnerships between ICE, mother of the New York Stock
Exchange, and Starbucks as well as Microsoft are still up to date - but there are no
new details.18 Nasdaq also intends to stick to its plan to enter the market with
futures contracts. Starting date is the first quarter of 2019, but talks are still
underway with the US regulatory authority CFTC. Nothing is set in stone.19
M&As and Europe
Another way to enter crypto is to become active in business yourself or to buy up
other companies. We have already mentioned several times that the market crash
of the past months can be good for Bitcoin - because dubious projects become
unprofitable as a result and perhaps even disappear. At the same time, the sector is
being consolidated and the financially strong companies are going on a shopping
spree. By October, the number of mergers and acquisitions (M&As) in the
crypto sector had already risen by more than 200 percent - compared to
the previous year. At least 30 deals are still open.20
The crypto industry is global and so far, appropriately, without a real financial
center. One of the biggest and most interesting deals, therefore, did not take place
in the USA, but in Europe. The Belgian investment company NXMH has
just bought the Bitstamp stock exchange - and paid cash for it. The
purchase price was not stated. Two years ago, Bitstamp, the largest cryptocurrency
exchange in the European Union, was valued at around $60 million. It can be
assumed that the valuation for the sale was significantly higher after the 2017
boom. Bitstamp has more than three million registered users and a daily
trading volume of $100 million dollars. For the two founders, Nejc Kodrič
and Damian Merlak, the deal was definitely successful. They founded Bitstamp in
Slovenia in August 2011 - in a garage. Their starting capital: A server, a few laptops
and a thousand euros in cash. Today, Bitstamp is registered in Luxembourg. It is
supposed to stay that way after the deal.21
—
18 https://www.theblockcrypto.com/2018/11/20/bakkt-has-pushed-back-its-bitcoin-futures-launch-to-2019-but-phase-
two-is-still-on-track/ 19 https://www.bloomberg.com/news/articles/2018-11-27/nasdaq-is-said-to-pursue-bitcoin-futures-despite-plunging-
prices 20 https://www.cnbc.com/2018/10/18/crypto-deal-makers-see-opportunity-in-bitcoins-price-slump.html 21 https://www.businessinsider.com/r-european-investment-firm-buys-digital-exchange-bitstamp-in-all-cash-deal-
2018-10?IR=T
“Everything will be tokenized
and connected by a blockchain
one day.”
Fred Ehrsam
15
Twitter: @CryptoManagers
Two more anecdotes from Europe, this time from the German-speaking area,
which is very close to us. We know from past reports that Switzerland is actively
trying to attract Blockchain and Bitcoin companies. As we reported in detail in our
October issue, the government of Liechtenstein is planning its own law, which is
already being praised by many as exemplary. But even the giant Germany is by no
means inactive. The hipster capital Berlin has a lively crypto scene. Now there is
an advance from the party of chancellor Angela Merkel. The CDU wants
to make Germany the number one ICO country and a "blockchain
financial centre".22
Austria has another way of doing things. In Austria, ICOs are supposed to be
carried out with legal certainty soon. A working group is to present results by the
end of the year - then there will be a new law. But a lot is already happening on a
small scale. The Graz-based company Coinfinity and the privately-owned
Austrian state printing company have developed a solution for
physical, offline storage of Bitcoin private keys. This is called “Chainlock” -
and is the solution to the custodian problem, so to speak, but more for private
individuals than for institutional investors.23
And the Viennese law firm Stadler & Völkel has succeeded in getting a
capital market prospectus for a Security Token Offering (STO)
approved by the supervisory authority for the first time.24 An STO can be
understood as a further development of the ICO. Like share owners, holders of
security tokens also have securitized rights and are not solely dependent on the
price development of a purchased token - as was the case with ICOs. In return, the
security tokens are subject to the same rules as other securities. For this reason,
Austria requires approval from the Financial Market Authority (FMA) before such
a token can be sold. The security token of Hydrominer, whose prospectus has just
been approved, is expected to be available to investors in February 2019.25
Central Banks and Stablecoins
After just learning a new abbreviation (STO) we now present another
one: CBDC. Central Bank Digital Currency. The subject is getting hotter
every day. Although to this day it's not even clear what we're actually talking about.
The media likes to pretend that the central banks experimenting with digital
money are developing their own "cryptocurrencies" like Bitcoin. But it's not that
simple. For them, the blockchain is a vehicle to create a digital equivalent for cash.
—
22 http://www.faz.net/aktuell/finanzen/digital-bezahlen/cdu-vorschlag-deutschland-soll-mekka-fuer-kryptogeld-
werden-15887209.html?printPagedArticle=- sync:ßÇÈâÈâ<font color="#ffff00">-= 23 https://www.trendingtopics.at/card-wallet-coinfinity-und-staatsdruckerei-bringen-neue-speicherloesung-fuer-
bitcoin/ 24 One of the partners of the law firm, Oliver Völkel, is member of the Advisory Boards of the Crypto Research
Report. 25 https://diepresse.com/home/wirtschaft/recht/5541879/Depot-in-der-Hosentasche_FMA-approved-
BlockchainEmission
“The interesting thing about
blockchain is that it has made it
possible for humanity to reach
consensus about a piece of data
without having any authority to
dictate it.”
Jaan Tallinn
16
Twitter: @CryptoManagers
Nouriel Roubini, the notorious Bitcoin hater, is firmly convinced that the CBDC of
the future will kill Bitcoin. Because no one would accept anarchy-money if they
could have state money, he reasons. However, Roubini overlooks the fact that
Bitcoin has something that digital central bank currencies can never have: its
deflationary character as discussed in depth in the interview with Saifedean
Ammous contained in this edition of the report.26
It is extremely unlikely for a central bank to ever issue a currency that
tends to appreciate. In the event of over-indebtedness, the expansion of the
money supply is often used as a form of concealed state financing. What can no
longer be completely ruled out today is the "denationalization of money" as
demanded and predicted by Friedrich August Hayek. He envisioned that
commercial banks will come into the market as money producers. That is still
possible. As far as private money is concerned, we are at the very beginning, but
the most important steps have been taken.
Christine Lagarde, the influential head of the International Monetary Fund (IMF),
has become aware of the issue. Central banks around the world need to be more
open to new technologies, she said recently in Singapore. "I think we should
consider issuing a digital currency. There must be a role for the state to provide the
digital economy with money.”27 She speaks of a "counterweight" for private
currencies and thus shows that even the high priests of money now consider the
existence of Bitcoin to be a given. Lagarde, like Hayek, also wants to involve the
banks. But them printing their own money is not part of the plan. Lagarde sees
CBDC primarily as a substitute for cash: "A digital currency could bring advantages
as a last resort for payments. And it could drive competition forward because it
offers an efficient alternative at a low price - just like its grandfather, the old,
reliable paper money." But the complete anonymity of cash would then be
gone.
—
26 https://www.project-syndicate.org/commentary/central-banks-take-over-digital-payments-no-cryptocurrencies-by-
nouriel-roubini-2018-11 27 http://www.faz.net/aktuell/wirtschaft/diginomics/iwf-chefin-fordert-digitale-waehrungen-15889788.html
“Alternatively, not to act in the
face of current developments and
completely leave the payment
market to private agents, will
ultimately leave the general
public entirely dependent on
private payment solutions, which
may make it more difficult for
the Riksbank to promote a safe
and efficient payment system.”
Riksbank
17
Twitter: @CryptoManagers
Figure 5: Tether USD Price and Growing Capitalization
Source: Coinmarketcap, Incrementum AG
Instead, Madame Lagarde proposes to record transactions and pass on the
details to the state only in case of suspicion. A delicate idea - but not
completely crazy, at least in constitutional countries where there is a separation
between the state and the central bank. However, Lagarde’s own experts from the
IMF are quite skeptical about the subject. A recent IMF paper on the subject states:
"All in all, it is still too early to assess the benefits of CBDC. Central banks
should take into account the specific circumstances in their respective
countries, pay cautious attention to risks and the benefits of other solutions. It
needs further analysis and studies of technical feasibility and costs."
It should be noted at this point that central banks are notoriously slow when it
comes to technical innovations. The plans for CBDC are by no means mature. One
thing is certain: we are not talking about digital money as we already know it. An
account balance is ultimately a claim to the bank. CBDCs must be currencies with
no counterparty risk - as with Bitcoin or gold. Even if the true motivation of
central banks and the IMF is the preservation of the money monopoly,
the efforts to obtain their own digital money ultimately indirectly
legitimize private alternatives such as Bitcoin conceptually.
It should come as no surprise to anyone that Sweden is the country where plans for
a CBDC are the most advanced. Sweden is regarded as the test tube of a cashless
society and is now reaching the limits of what is feasible. There have long been
protests by citizens against the abolition of cash, which has been pushed mainly by
banks. This is one of the reasons why the central bank launched the E-Krona
project and is currently investigating the various technical possibilities for
introducing an electronic Krona. The Riksbank, the Swedish central bank, has now
“A Blockchain fulfills the ideal
conditions for digitizing money,
assets and intellectual property.”
Princess Gisela von und zu
Liechtenstein
May 2018 Jul 2018 Sep 2018 Nov 2018
0
50M
100M
150M
200M
0.98
1
1.02
1.04
1.06
1.08
0
20M
40M
60M
80M
Market Cap (USD) Daily Volume (USD) Tether Price (USD)
18
Twitter: @CryptoManagers
called on the government to create the necessary legal framework for a possible
introduction of an E-Krona. "If the marginalisation of cash continues, a digital
krona, an e‐krona, could ensure that the general public still has access to a state-
guaranteed means of payment", the Riksbank said.28
Figure 6: Stablecoins Categorized by Funding in Dollars
Source: Incrementum AG
2019 will see the rise and expansion of private stablecoins. Joining
Tether is also the Gemini Dollar, TrueUSD and Paxos. And of course, USDCoin,
which is backed by no one other than Circle, in which Goldman Sachs is also
invested. USDCoin is now even used and offered by the Bitcoin giant
Coinbase.2930 Currently there are more than 50 such stablecoins. Some of them
are not even tied to an existing national currency - but most of them are. During
falling Bitcoin prices, investors can save their digital money in a USD stablecoin
and wait until the market calms down. Of course, the controversies surrounding
the original stablecoin Tether are not over. Even the US authorities are now
investigating accusations that the backers of Tether and the Bitfinex stock
exchange manipulated the Bitcoin price.31
—
28 http://fortune.com/2018/10/26/sweden-riksbank-e-krona/29 https://www.bloomberg.com/news/articles/2018-10-29/stable-coin-backed-by-circle-coinbase-draws-most-early-
demand 30 https://www.bloomberg.com/news/articles/2018-10-23/crypto-exchange-coinbase-to-list-stable-coin-backed-by-
circle?srnd=cryptocurrencies 31 https://www.bloomberg.com/news/articles/2018-11-20/bitcoin-rigging-criminal-probe-is-said-to-focus-on-tie-to-
tether
“It is a good alternative to
central bank-issued money and
through competition could
eventually enforce more
monetary policy discipline in the
current system.”
Princess Gisela von und zu
Liechtenstein
Algorithmic
174,000,000
49.6%
Off-Chain Asset Backed
144,000,000
41%
Crypto-Collateralized
33,000,000
9.4%
19
Twitter: @CryptoManagers
Figure 7: Stablecoins in Comparison
Source: Coinmarketcap, Incrementum AG
ICO-Bust and Outlook
The SEC has dozens of investigations into crypto matters under way.32
Two providers of ICOs (Airfox and Paragon Coin) had to pay fines of $250,000
each and compensate investors. They conducted their ICOs after the SEC issued an
explicit warning last summer that ICOs were illegal sales of securities.33 The
penalties imposed by the SEC on two celebrities who had advertised dubious
crypto currencies are likely to be much more effective. The boxer Floyd
Mayweather and the hip-hop star DJ Khaled accepted fines of $300,000 and
$100,000 dollars, respectively, as part of a settlement. The celebrities also had to
relinquish the proceeds from their promotional activities - amounting to a further
$300,000 and $50,000 respectively. According to the SEC, they had advertised
ICOs on social media without disclosing that they were being paid.
Both celebrities had advertised Centra, a project that has been in the SEC's sights
for quite some time. "Investors should be sceptical about investment advice posted
on social media platforms and not make decisions based on recommendations
from celebrities", warned Steven Peikin of the SEC. "Social media influencers are
often paid promoters.”34
While we consider it positive that the authorities have intervened here, it must be
said that it is a drop in the ocean. Investors should be extremely careful with any
form of information they obtain from the crypto-media and crypto-influencer
environment. Three independent studies have shown that the media, so-
called rating agencies, and individuals on social media and on YouTube
are highly corrupt. The "Breaker" magazine wrote to 22 different crypto media
—
32 http://fortune.com/2018/11/02/sec-ico-report-cryptocurrency-scams/ 33 http://fortune.com/2018/11/16/sec-airfox/ 34 https://diepresse.com/home/wirtschaft/5538851/KryptogeldWerbung_High penalties for Boxer Mayweather and
DJ Khaled
“It’s surprising just how easy it is
without any tech skill to commit
cybercrimes like ransomware.”
Rick McElroy,
Carbon Black security strategist
Tether $2.6B
TrueUSD $71.7M
DAI $54.5M
Bridgecoin $25.1M
BitUSD $11.9M
AAA Reserve $3M
Digix Gold $1.9M
Nubits $1.7M
Hellogold $1.3M
NUSD $1.1M
20
Twitter: @CryptoManagers
companies from a fake address of an alleged Russian PR man. The result: more
than half of the websites would have taken money for articles without
marking them as "ads" or "sponsored". Some were even willing to simply
adopt ready-made PR texts and pass them off as their own. The smallest websites
took less than $300. The largest more than $3000. In any case, this study explains
why there are so many miserably written texts on the Internet about relatively
obscure coins. Advertising is subtle. Among the websites that take money for
reports are some of the best-known names in the cryptosector. But to be fair:
Around 10 of the websites contacted immediately rejected the offer.35
But news sites are just the tip of the iceberg. The covert advertising campaigns are
often managed by so-called ICO agencies, which have price lists for various
channels at hand. These agencies do not only take care of the marketing of a coin
on the relevant websites, but also provide comments and traffic in the Telegram
groups and other social networks. Many people who discuss cryptocoins or
ICOs on YouTube are also paid for their service. Research by Breaker,
Techcrunch and Reuters paints a picture of a deeply corrupt industry at the heart
of which is the hunt for money by ICOs.3637
If the drop in prices and the SEC's crackdown leads to this swamp being drained,
then this should be welcomed. This is part of the development of the sector
towards more professionalism. As far as mainstream acceptance is concerned, we
no longer need to worry. Years after Bitcoin's first appearance on "The Good Wife",
a feature film with Kurt Russel is soon to come. The title is simply "Crypto".38
And shortly before this report went to press, this news came in: Electronics giant
Samsung is supposedly working on a cryptowallet for their smartphones. If there is
any truth to this, it would be another big step into the mainstream. And a
confirmation of the old thesis: While prices are falling, true innovations are
taking place.39
—
35 https://breakermag.com/we-asked-crypto-news-outlets-if-theyd-take-money-to-cover-a-project-more-than-half-
said-yes/ 36 https://www.reuters.com/article/us-crypto-currencies-promoters-specialre/special-report-little-known-to-many-
investors-cryptocurrency-reviews-are-for-sale-idUSKCN1NW17S 37 https://techcrunch.com/2018/09/18/inside-the-pay-for-post-ico-industry/ 38 https://www.imdb.com/title/tt8563452/ 39 https://www.sammobile.com/2018/12/11/exclusive-samsung-bitcoin-app-cold-wallet-cryptocurrencies/
“For Mises, gold’s industrial role
is an impediment to performing
its monetary role, an
impediment with which he is
happy to contend compared to
the alternative of money whose
supply is controlled by
governments.”
Saifedean Ammous
Home of Cryptocurrency
**
Crypto Concepts:
Custody Solutions for
Crypto Currencies
“The next level for the crypto community is for additional institutions to enter the space. They will only do so if there is a super secure way of storing the assets
or the private key.”
Philipp Vonmoos, CEO of Swiss Crypto Vault AG
Key Takeaways
At no point should a crypto custody solution provider have access to a client’s unencrypted private key.
The industry standard may very well become Hardware Security Modules (HSMs) for the creation of
private keys.
Reputation and experience should be considered when evaluating a crypto custody solution for your
organization.
Consider that outsourcing your private key storage is similar to outsourcing your gold storage. In case
of an emergency, will you be able to access your cryptocurrency if someone else is the gatekeeper?
Authored by Joseph Annuzzi Jr.
Joseph Annuzzi Jr is the founder and CEO of a stealth cryptocurrency decentralized
exchange and the sole inventor of a novel cryptocurrency secret key protection
algorithm designed for consumers. He is a software architect and entrepreneur from
Silicon Valley and an author of a series of computer science text books published by
Pearson Education, Inc. He is also the owner of cryptocustodysolutions.io a resource
for crypto custody solutions. Photo: Joseph Annuzzi
23
Twitter: @CryptoManagers
In this article, we explore solutions for institutional cryptocurrency
custody. Cryptocurrency custody solutions are needed because improper
handling and storage of cryptocurrencies can result in loss or even theft. Self-
managed cryptocurrency accounts are not insured against loss or theft, and law
enforcement may have difficulty in recovering stolen cryptocurrency such as
Bitcoin depending on the different ways thieves attempt to mask their efforts.
From a regulatory point of view, professional custody solutions can also be
compulsory. As is the case with investment funds. Thus, there is an increased
demand for professional solutions.
Not All Institutional Storage Solutions Are Made Equal
Let’s begin with a brief overview of some of the components required
to use cryptocurrency. One such component is a cryptographic key pair in the
form of a public key and private key. The public key is used to derive a public
cryptocurrency address that may be made available to the public. A cryptocurrency
address is very similar to an email address, meaning, anyone with knowledge of
the address can send information to that address, in the form of a balance of coins
or tokens. A cryptocurrency address has a record of its balance and is able to
receive and send an amount of cryptocurrency, provided the owner of the
cryptocurrency address has access to its associated private key. The private key
must always remain private and is much like a password for a particular
cryptocurrency address. Only the owner of a cryptocurrency address should have
access to the private key. Revealing the private key to an unauthorized party puts a
cryptocurrency address at risk for theft of its balance. Further, to spend any
balance associated with a particular cryptocurrency address, access to the private
key of that address is required to authorize the transaction. One wouldn’t want to
give an unauthorized party access to their email password, so in the same respect,
one would not want to give an unauthorized party access to their cryptocurrency
private key. The cryptocurrency address or the balance associated with a
cryptocurrency address is not the asset that needs protection. A user’s private key
associated with a cryptocurrency address is the asset that needs protection.
In the last issue of the Crypto Research Report, we explored this topic and titled
the entire issue ("Handy Theft Edition"). The private key requires extreme care
and consideration with its storage and security and failure to maintain the utmost
of care may result in loss or theft of cryptocurrency. Anyone who has been around
the cryptocurrency space for some time has probably seen news related to theft of
cryptocurrency. Theft of cryptocurrency has been a focus of cyber criminals
because once stolen, it is impossible to reverse a transaction. The only
way to recover any funds would be to gain access to any private key associated with
any cryptocurrency address that has taken custody of the stolen funds. Good luck
locating extremely sophisticated cyber criminals in this day and age.
Theft is not limited to criminals hacking into computer systems of an organization.
Theft could also originate from within the organization if one or more of the wrong
personnel are put in charge of the safekeeping of the private keys associated with
“As the crypto-asset class
seasons and institutional
demand builds, there are a
plethora of opportunities for
traditional firms to engage in the
eco-system. These include the
provision of custodial and asset
management services as well as
traditional brokerage functions
like market-making.”
CNBC
24
Twitter: @CryptoManagers
any cryptocurrency address holdings. Let’s consider how institutions are
organized, for example, a corporation or other similarly organized entity. Being
that an institution may be made up of more than one individual, comprising
personnel that makes up a board of directors, executive management, and other
such employees, how should a company decide who should have the rights to
access and secure the private key associated with a cryptocurrency address?
Should it be the chairman? The board? An executive, such as the CEO or the CFO?
A particular employee such as a software developer? What about a combination of
one or more of the preceding options? An organization might ultimately decide
that a combination of personnel comprised of a board member, an executive, and a
software developer is required to transact with any cryptocurrency holdings.
With the complexities associated with storing and securing cryptocurrency, we
should be able to see that there is an opportunity for businesses to provide
cryptocurrency custody solutions for those lacking the sophistication or resources
required for securing private keys for cryptocurrency addresses that are associated
with large holdings.
Via our Twitter Channel @cryptomanagers, we invited institutional custody
solutions to provide us with some information about their products. The following
five companies which offer custodian services of cryptocurrencies reached out to
us. In exclusive interviews with the security officers, we gained knowledge of how
these different firms attempt to solve the custody problem for investors. Our
research results lead us to the conclusion that not all storage solutions are made
equal. Many thanks to all contributing companies for their helpful cooperation.
The results presented here are based on the information provided by the providers
and are not guaranteed.
Crypto Storage AG
The first crypto custody solution that we investigated was Crypto Storage AG.40
Crypto Storage AG is a subsidiary company of Crypto Finance AG which was
founded in 2017 and is based in Zug, Switzerland. Crypto Storage AG offers
services for storing blockchain based assets securely through a compelling
infrastructure solution. We had the pleasure of speaking with the CEO, Stijn
Vander Straeten, and the Technical Sales Engineer and Implementation Project
Manager, Maria Sommerhalder. According to the company’s material, they have
over 40 internal and 13 external professionals involved with creation and
implementation of the solution.
The infrastructure of Crypto Storage AG is made up of a transaction user interface
that communicates with a backend server infrastructure that specializes in
bookkeeping and relaying of messages between the Hardware Security Modules
(HSMs) and the Hardware Approval Terminals (ATs). An HSM is a computer with
—
40 See “Storage,” Crypto Finance, 2018.
“There are a lot of investors
where custodianship was the
final barrier. Over the next year,
the market will come to
recognize that custodianship is a
solved problem. This will unlock
a big wave of capital.”
Kyle Samani,
Multicoin Capital hedge fund
manager
“Blockchain Technology Could
Save Banks $12 Billion Per Year.”
Mohsin Jameel
25
Twitter: @CryptoManagers
cryptographic processing capabilities that operates within a tamper-resistant
hardware device that is capable of performing encryption and decryption, key
generation, and digital signature creation and verification. Some HSM
manufacturers allow for customizing the processing capabilities through
programmable extensions made possible with software development kits or by
special request.
The backend server infrastructure and the HSMs are distributed across
Switzerland in a georedundant fashion, and one of the locations used to be a
military bunker located in the Swiss Alps. Georedundancy provides strong
assurances that if one location goes offline there is another location available as a
backup. The ATs are installed at the client’s facility and are linked
cryptographically with the backend servers and HSMs through encrypted
communication. The company behind the HSMs and the ATs is called Securosys,
which is based in Zürich, Switzerland. The company involved with the operational
security aspects and backend software development is AdNovum, which is also
based in Zürich, Switzerland. These companies assisted in the development and
implementation of Crypto Storage AG’s solution.
What is unique about the Crypto Storage AG solution is the combination of HSMs
and ATs that are cryptographically paired. This allows for both hot and cold
storage capabilities for the client where the private keys are generated on the HSM
and never leave the device, thus, being the cold storage aspect. Crypto Storage AG
is unable to access the client’s private keys stored on the HSM due to its secure
tamper-proof construction. In addition, the cryptographically paired ATs provide
hot-wallet-like capabilities where the client may initiate withdrawal
transactions out of cold storage while being able to rely on a secure
device. Crypto Storage AG refers to this as “deep cold storage allowing for the
flexibility and speed of a hot wallet.”
Further, the client is able to design a custom approval framework where the client
can mirror their own operational processes for approving crypto transactions. The
approval framework allows for the design of rules which are then stored with the
“The New York State Limited
Purpose Trust charter, which
now enables Coinbase Custody to
act as a Qualified Custodian for
crypto assets, builds on our
unparalleled success as a crypto
custodian while holding the
company to the same exacting
fiduciary standards and
oversight of other, mature
financial institutions operating
in New York.”
Asiff Hirji,
Coinbase COO and president
Approval Terminal and Hardware Security Module Increases Security. Source: Crypto Storage AG
26
Twitter: @CryptoManagers
private key inside the HSM. For example, an m-of-n approver scheme might be
configured for initiating any transaction, where one or more groups of approvers
are required. Time delays may also be configured to ensure that any withdrawal
transaction follows the appropriate governance procedure suitable for the client.
The ATs have the same security standards as the HSMs and the ATs require a
personalized smart card and pin code per approver to initiate any withdrawal
transaction. This solution is an extremely powerful yet highly secure means of
storing and transacting with crypto.
Crypto Storage AG supports 59 out of the top 100 cryptocurrencies by
market capitalization and new cryptocurrencies are added regularly.
Target clients are banks, asset custodians, family offices, brokers, insurance
companies, pension funds, exchanges, and foundations. As for insurance, the
technical infrastructure is covered which may include some client
assets but not all. How much of one’s assets may be insurable is definitely worth
investigating when exploring Crypto Storage AG as a potential custody
infrastructure provider.
Overall, Crypto Storage AG has a very compelling solution worth exploring for any
institution or private individual that desires extremely secure storage with near
immediate withdrawal capabilities and a highly configurable governance process if
desired.
“As to storing coins safely, I’d say
a hardware wallet, however a lot
of care is required in avoiding
compromised hardware. Using
multiple hardware wallets from
multiple vendors in a multisig
configuration would probably be
the safest at this point.”
Mark Karpelès,
former chief executive of Mt.Gox.
27
Twitter: @CryptoManagers
Card Wallet by Coinfinity.
Source: Coinfinity GmbH
Figure 8: System Architecture of Crypto Storage AG.
Source: Crypto Storage AG
Card Wallet
Card Wallet is another company that we reviewed, which is a co-
production between Coinfinity and the Austrian State Printing
House. Coinfinity is a Bitcoin broker based in Austria that offers
services to both businesses and consumers. Coinfinity also offers
consumers the ability to purchase Bitcoin at retail outlets
throughout Austria at nearly more than 4,000 locations and is
also known for installing the first Bitcoin ATM in Austria.
In addition to retail locations, Coinfinity also provides services that
allow merchants to get paid in Bitcoin. The Austrian State Printing
House is known for their services in printing identity documents in
a highly secure facility and controlled fashion. Together, their
services are used for operating Card Wallet.
Managing Director of Coinfinity, Max Tertinegg explained in an exclusive
interview that Card Wallet is a credit-card-sized tamper-proof card that
allows customers to store Bitcoin in an offline manner, similar to how
one would store Bitcoin using a paper wallet, that is, writing down the
private key on a piece of paper. The difference is that Card Wallet is a
polycarbonate plastic card and a Bitcoin private key is laser-etched directly onto
the card and then covered and sealed with a tamper-proof sticker. The private key
is generated with what Card Wallet defines as Secure Entropy Technology (SET).
28
Twitter: @CryptoManagers
According to Max, SET leverages three random number generators for generating
the entropy for deriving a Bitcoin private key printed on the card. Entropy is a way
to generate an unpredictable output of information that is nearly impossible to
reproduce. The random number generators are made up of a hardware device
provided by the Austrian State Printing House, a software solution provided by the
Austrian State Printing House, and a human-
derived random number generator performed by the
personnel of Card Wallet by rolling dice and then
documenting the results to produce the random
number. When these three generated random
numbers are combined, they are used as inputs for
generating a Bitcoin private key that is then laser-
etched onto a physical card.
The printing of cards is performed in a secure room
of the Austrian State Printing House and, according
to Max, is protected by approximately seven or eight
different physical firewalls, so one could imagine
how secure the facility may be. No copy of any
private key is stored on any permanent storage
means, and, assuming the facility maintains its
security guarantees, in theory, the personnel at the
facility will never gain access to the private keys.
The card is reasonably priced at €59 and currently
supports Bitcoin. In the future, Ether along with
other cryptocurrencies will be supported. Card
Wallet is very similar to a pre-paid gift card and
seems most appropriate for insignificant amounts of
cryptocurrency, maybe for gifting a family member
or friend. Given the counterfeiting possibility of card
storage solutions, the party who receives this as a
gift should be told to only purchase new Card
Wallets directly from the manufacturer.
For the institutional or wealthy investor looking to
securely store hundreds of thousands, or millions, a
different custody option may be more appropriate.
In view of the possibility of forgery, Card Wallets
should only be purchased directly from the
manufacturer.
Daenerys & Co.
Daenerys & Co. is another crypto custody solution that comes from the Silver
Bullion Group. Silver Bullion Group was founded in 2009 by Gregor Gregersen
and is based in Singapore. Silver Bullion Group offers secure storage facilities for
precious metals, provides insurance, as well as liquidity services. Since 2009,
Silver Bullion Group has done over $400 million in sales. As Silver Bullion Group
Attack Vectors of Card Storage Solutions
1) Since the private keys exist on a computer system in
temporary memory for a brief moment in time before it is
laser-etched onto a card, a bad actor within the facility or
who compromised the facility infrastructure could
potentially gain access to one or more private keys. This
attack scenario is highly unlikely and would require the
coordination of many different parties to execute.
2) During the shipment of a card, a postal facility could
potentially intercept and swap a counterfeit card in place
of a genuine card as it is making its way to a customer.
This type of attack would require the coordination of
many actors across many different facilities, but it is not
impossible. Credit cards passing through postal facilities
on their way to unsuspecting customers have been known
to go missing while in transit. Registered shipping
significantly reduces the risk. Registered shipping
significantly reduces the risk.
3) Counterfeit cards listed for sale on an online marketplace,
such as eBay or Amazon, could accidentally be purchased.
A counterfeit card would mean the unsuspecting
customer is purchasing a deposit address under the
control of a criminal or a private key that has been
intentionally compromised so any deposits of Bitcoin
could be stolen by the criminal. Counterfeiting is not
impossible, as we have seen occurrences of counterfeit
consumer hardware wallets purchased at online
marketplaces, such as eBay and Amazon.
29
Twitter: @CryptoManagers
Secure vault at the Daenerys facility.
Source: Daenery’s & Co.
Encrypted polycarbonate card of Daenerys & Co.
Source: Daenery’s & Co.
has done with safeguarding precious metals, Daenerys came from a need to solve
custodial and compliance issues as they pertain to digital assets. Gregor Gregersen
and Clint Mark Gono are positioning Daenerys to be a leader in the space with a
one-of-a-kind business and security protocol called the Gregersen-Gono Physical
Crypto Storage (GGPCS) standard.41 GGPCS is currently being used at Silver
Bullion Group’s vaulting company called The Safe House.
The process begins in a secure vault on computers that have
no Internet connection. These computers generate a Bitcoin
private key within the temporary memory of the computer, then
encrypt this private key with a first encryption key, and then encrypt
it once again with a second encryption key. Each of these encrypted
private keys is then laser-etched, in the form of a QR code, onto its
own polycarbonate plastic card, a primary card, and a recovery card.
Once the encryption process is finished, the private key is then wiped
from the computers’ temporary memory and is not stored anywhere
in the permanent storage of the device. The cards are then analyzed to
ensure the etching process performed as expected and that the QR code is
readable. The polycarbonate plastic is a material that is capable of surviving long
periods of time, although the material is not fireproof but supposedly
readable even if up to 30 % of the card become damaged. This is why it is
useful to have a primary card and a recovery card. If the primary card suffers any
sort of damage, the recovery card stored at a different physical location could be
used to recover any assets associated with that Bitcoin private key. Once the
etching process is complete, the card is then placed in a lockbox that resembles a
gold bar, and that lockbox is then stored in the facility in a manner similar to how
gold bars are secured.
Once the client has access to the deposit address associated with a particular
private key, the client is then able to initiate a deposit to that address. On the other
hand, withdrawals from this address require a multistep process to ensure the
withdrawal request is coming from the actual client initiating such a withdrawal.
Prior to a withdrawal, the client is required to configure Authorization Mandate
rules. These rules might reflect the client’s governance structure within their own
organization, where one or more authorized representatives, such as the CEO, the
CFO, and/or the compliance officer, are all required to approve such a withdrawal,
or possibly two of those three. Daenerys uses a live video conference to
authenticate the representative initiating the withdrawal, and any withdrawal may
only be made to a preapproved address.
Insuring one’s cryptocurrency assets is probably a great idea when someone else
maintains custody. Daenerys also offers an optional insurance policy
where an individual card is insurable up to $5 million. The insurance
—
41 See “Crypto Currency Physical Storage,” Gregor Gregersen and Clint Mark Gono, Little Bit, September 21, 2018.
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Twitter: @CryptoManagers
Blockvault focuses on Know-Your-Customer and
Anti-Money Laundering.
Source: Blockvault
provider has a Standard & Poor’s A+ rating, is based in London, and is something
worth looking into.
Blockvault
Another crypto custody solution investigated was Blockvault, which is powered by
Goldmoney Inc. We had the pleasure of speaking with Josh Crumb, co-founder
and director of Goldmoney, and Will Felsky, director of operations of Blockvault.
Goldmoney is a company that provides a way for institutions to invest in precious
metals. The company was also founded in 1999 and is a public company listed
on the Toronto Stock Exchange (XAUMF). Their current customers rely on
Goldmoney to secure $2 billion worth of assets. Goldmoney is also a debt-
free company with more than $100 million at its disposal.
Being that Goldmoney is in the precious metal’s storage business, they have access
to precious metal storage facilities around the world. Goldmoney saw an
opportunity to provide similar custody solutions for institutional clients in the
crypto space. They are leveraging their network of vault providers around the
world for Blockvault.
Blockvault offers its clients an offline private key storage of crypto. The private
keys are created by Blockvault, although the method of private key generation was
not disclosed during the interview. Regardless, client’s cryptoassets may be
covered under an insurance policy. The company’s auditor is KPMG, and they are
used to confirm and verify that the assets under its management are in fact in its
respective vault. KPMG is also the auditor for Goldmoney where they perform
IASC audits for gold bar custody confirmation. The Blockvault insurance they are
offering is made up of a collection of many of the major insurance companies.
Blockvault also mentioned that their vault providers, auditors, and insurance
partners are all publicly traded businesses. They are currently working
with vault providers in Canada, United States, United Kingdom,
Switzerland, Dubai, Singapore, and Hong Kong.
Blockvault described the high-level process of how their offering
works. It begins with know-your-customer (KYC) and anti-money-
laundering (AML) checks during the client onboarding process. Once
through the onboarding process, the client is provided with a trade
receipt of a list of addresses that they are able to deposit their crypto
funds to. Blockvault’s target clients are regulated or registered
financial institutions, banks, broker-dealers, registered funds,
cryptocurrency miners, and other similar businesses that can pass bank
level KYC/AML tests. The target customer is more than likely the
institution looking to safeguard $50 million or more in crypto, although
they would be willing to accept clients starting with $1 million. They
recommend that each address store approximately $50,000 worth of crypto, so if
depositing $1 million of crypto, those assets would be safeguarded across 20
different crypto addresses that have a corresponding key pair. Every deposit is
issued a trade receipt, and the governance model for how to deposit and withdraw
“A lot of people are unaware in
this new gold rush, people are
using cloud wallets and not
securing their money.”
Rick McElroy
31
Twitter: @CryptoManagers
is customizable by the client, and that is something that is usually agreed-upon
through the contractual relationship with Blockvault. As for the maximum amount
of cryptocurrency insurable, they prefer to have those conversations directly with
the client. Further, withdrawals and trading of cryptocurrency assets are able to be
performed within one business day to an address of the clients choosing.
Assets that Blockvault supports safeguarding in their vaults include Bitcoin,
Bitcoin Cash, Ether, XRP, Litecoin, as well as all ERC20 tokens. Coming soon, they
will be supporting XLM. Blockvault also mentioned the potential for financial
institutions to white label the Blockvault service and offer it to their own clients.
Overall Blockvault seems to be in a great position and has a long history and track
record of safeguarding precious metals for its clients. Any company looking into
their solution should inquire about the private key generation and storage methods
employed and should also ask about their insurance policy.
Swiss Crypto Vault AG
Swiss Crypto Vault AG (SCV) is branded as a hyper-secure crypto storage solution
for institutional investors and high-net-worth individuals (HNWI) and is a joint
venture between Bitcoin Suisse AG and Swiss Gold Safe AG. For this interview, we
had the pleasure of speaking with Philipp Vonmoos, CEO of SCV.
If you are from the cryptocurrency space, you may have heard of Bitcoin Suisse,
who is known for its cryptocurrency-related financial services and storage
solutions for institutional and private clients. Established in 2013, Bitcoin Suisse
has helped facilitate and raise nearly ₣1 billion for initial coin offerings (ICOs) or
token generation events (TGEs) for some of the most well-known cryptocurrency
projects. If you are from the precious metals space, you may have heard of Swiss
Gold Safe AG, which is known for its precious metals and valuables storage
services. Established in 2006, Swiss Gold Safe has helped secure precious metals
and valuables for institutions and HNWI. SCV was formed under the laws of
Switzerland in 2017 and is based in Zug. The partnership between the two
organizations to form SCV was to combine their knowledge of cryptocurrency
handling and physical security and storage.
“Theft of cryptocurrencies
through hacking of exchanges
and trading platforms soared to
$927 million in the first nine
months of the year, up nearly
250 percent from the level seen
in 2017.”
CipherTrace,
US Cyber Security Firm
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Attack Vectors of Private Key Generation Without
Hardware Security Modules
1) As Daenerys does not use a Hardware Security Module
(HSM), there is a small window when the private key
remains within the temporary memory of the computer
that generates the private key. Being that the computer
has no Internet access, it’s impossible for hackers outside
the facility to penetrate their system, but it might be
possible for an insider, such as someone who has physical
access to the device that generates the private keys, to
compromise the device in some way. Considering how
secure the facility must be to store the amount of precious
metals Daenerys is safeguarding, executing this attack is
highly unlikely.
2) Another attack vector could be during a withdrawal
process, where internal personnel swap out a whitelisted
client address for their own.
Implementing the key creation process on an HSM would ensure
that the private key never has the ability to leave the device and
whitelisted addresses could also be preconfigured on the HSM.
Therefore, both attack vectors could be ameliorated if
implemented.
Figure 9: Withdrawal Process of Swiss Crypto Vault.
Source: Swiss Crypto Vault AG.
SCV’s solution provides clients with a deposit address
that is associated with a private key that was
generated on an HSM so the private key never
leaves the device. The client is able to deposit their
cryptocurrency assets as needed into the deposit address.
The private keys are redundantly distributed, after being
encrypted, ensuring that if one facility were to suffer a
catastrophic event there is a backup to your private keys.
The governance model is highly customizable by the
client, allowing for multi-signature transactions and role
designations of requester, controller, and approver. The
requester, using the web portal, is able to initiate
withdrawals. One or more controllers are able to cancel a
withdrawal request and two or more approvers are able
to approve a withdrawal request. An optional time delay
may also be defined, and withdrawals are only allowed to
be delivered to preapproved addresses. Another
configuration the client is able to make is the selection of
a handling partner. To prevent Swiss Crypto Vault from
having complete authority over the withdrawal process in
case their personnel or computer systems were to ever
become compromised, a handling partner is a
company different from Swiss Crypto Vault, that
provides the client with the additional benefit
that the authorization of 2 separate
organizations with different business operations,
personnel, and computer infrastructure are
required to authorize the client’s withdrawal request. Requiring 2
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Twitter: @CryptoManagers
organizations to authorize a withdrawal request is in addition to the clients own
configurable withdrawal approval process. Currently, the only handling partner is
Bitcoin Suisse, with the promise that other handling partners will be available for
clients to utilize in the future. This architecture is similar to a multi-signature
transaction, in that more than one party is required to authorize a withdrawal. In
other words, both Swiss Crypto Vault and the chosen handling partner (currently
only Bitcoin Suisse) must both agree to authorize a withdrawal request otherwise a
withdrawal request will be denied. This is a worthwhile safety feature which
reduces the odds of both organizations being compromised when a client makes a
withdrawal request.
PriceWaterhouseCoopers reviewed the storage solution, oversaw the private key
generation, and will also compare the amount of stored crypto assets to the
balances registered on the associated blockchain. Zuhlke Engineering reviewed the
private key generation code. They don’t yet offer insurance, but this is
something that they said they are looking into. As for their clients, they are
currently serving those from Europe, USA, Asia, and the Middle East. As for the
typical client deposit amount, SCV makes sense for those starting around
₣500,000, up to triple digit millions. A SCV client does not require any physical
hardware installed on their end, although they may co-sign a transaction with the
private key of their own Trezor or Ledger hardware wallet under their control.
They may also leverage multi-factor authentication for accessing the web portal.
Many types of cryptocurrencies are supported as of today, such as Bitcoin, Bitcoin
Cash, Bitcoin Gold, Ether, Litecoin, and all ERC20 and ERC223 tokens. Others will
be added on an ongoing basis.
Swiss Crypto Vault appears to be a highly redundant, highly secure, well thought-
out implementation and process that is also easy to use and configure by the client.
SCV is backed by a track record of experience and expertise in both cryptocurrency
and precious metals. The solution is suitable for both institutions and HNWIs, and
definitely a crypto custody solution worth investigating.
HSMs Matter and Outlook
In this article, we covered a few options for crypto custody solutions. Two solutions
ensure that a private key never leaves an HSM, two others generate the private key
in temporary storage where it remains for a brief moment. The final solution
desired to maintain confidentiality and secrecy of their private key generation
process. For those where the private key is not generated on a HSM, an insurance
policy could make up for any potential
vulnerabilities assuming the policy covers
theft and is bullet-proof. As for
technological innovation, speed, ease of
use, customization of governance,
physical security, and digital security, the
most well-rounded solutions appear to be
Swiss Crypto Vault AG and Crypto
Storage AG. Of those two, Swiss Crypto
“The New York State Limited
Purpose Trust charter, which
now enables Coinbase Custody to
act as a Qualified Custodian for
crypto assets, builds on our
unparalleled success as a crypto
custodian while holding the
company to the same exacting
fiduciary standards and
oversight of other, mature
financial institutions operating
in New York.”
Asiff Hirji,
Coinbase COO and president
Source: Scott Adams, Dilbert
34
Twitter: @CryptoManagers
Vault AG has the longest track record and most experience. Crypto Storage AG
appears to be the most innovative solution. If your organization requires insured
options, Daenerys & Co. and Blockvault may be right for your organization. Both
are capable and in positions for the physical storage of large sums of
cryptocurrency. These evaluations are not meant to be recommendations of one
company over the other, as they each have their own use case. We should stress the
importance of doing your own due diligence when investigating the solution that is
right for your organization.
If you have any questions or comments, are looking for a solution for your
organization, or if you have your own solution that you are interested in sharing,
please head over to this website for participating in a brief survey and be entered
for a chance to win a Ledger Nano S sent directly from the manufacturer. Joseph
can also be reached at joseph (at) cryptocustodysolutions.io.
Disclaimer: Coinfinity and Silver Bullion are associated with In Gold We Trust and
the Crypto Research Report. None of the information you read in this article
should be taken as investment advice, nor do the writers of the Crypto Research
Report endorse any project that may be mentioned or linked to in this article.
Please do your own due diligence before taking any action related to content within
this article.
A Bitcoin Standard?
Saifedean Ammous
Musing with the Crypto
Research Report
“Sound money is money that gains in value slightly over time, meaning that holding onto it is likely to offer an
increase in purchasing power”
Saifedean Ammous
Key Takeaways
One reason gold has been used as a store of value and medium of account is because of its low
annual supply growth. The optimal money would have zero supply growth.
In a free market for money, money would appreciate in value every year. Therefore, banks
would no longer pay interest on deposits. Instead, depositors would choose between a deposit
contract, a mutuum contract, or a private equity investment.
A debt-based monetary system must be inflationary because interest payments must be made.
As investors gradually purchase cryptocurrencies and pay off debt in the fiat system, the fiat
money supply will contract over time.
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Twitter: @CryptoManagers
We want to Thank Saifedean Ammous for having an exclusive
conference call with Demelza Hays and Mark Valek from
Incrementum. Saifedean Ammous is a Professor of Economics at the American
University in Lebanon, and he is the author of the bestseller The Bitcoin Standard.
Bitcoin’s Stock-to-Flow Ratio catching up to Gold’s
A starting point for Saif’s analysis of different monies is the stock-to-flow ratio.
Readers of our sister report – the “In Gold we Trust” Report are well aware of this
concept, as we have discussed it at length. Most people fail to understand why gold
has been used as a store of value for thousands of years. It is true that Gold is
scarce. However, it is definitely not the scarcest metal at all. Rather its above-
ground quantity has the most constant quantity of any rare commodity available.
The quantity of a good can be expressed in the stock-to-flow ratio. A high stock-to-
flow ratio means its quantity is not inflated very much. An ideal unit of account for
measuring value obviously needs low fluctuation of the ‘yard stick’. The master of
the British Mint and inventor of the gold standard, Sir Isaac Newton, said,
“Gentlemen, in applied mathematics, you must describe your unit.”
Even though gold has a very high stock-to-flow ratio, Bitcoin will soon
have a higher one. Its capped supply is one reason Saifedean Ammous
claims that Bitcoin is even better than gold.
In the figure below, Bitcoin has a stock-to-flow ratio of around 71 currently, but by
2020, because of the halving, the ratio will be going up to 119.
Figure 10: Bitcoin versus Gold Stock to Flow
Source: Incrementum
“For Mises, gold’s industrial role
is an impediment to performing
its monetary role, but an
impediment with which he is
happy to contend compared to
the alternative of money whose
supply is controlled by
governments.”
Saifedean Ammous
Source: Saifedean
Ammous
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Twitter: @CryptoManagers
Taming Bitcoin’s Volatility?
In The Journal of Structured Finance, Saif wrote a paper, “Can Bitcoin’s Volatility
Be Tamed”, about how the price of gold is affected by the demand from the
jewellery market and industry. When people sell gold excessively, the price of gold
drops. However, demand from jewelry makers and industrial fabricators absorbs
the price drop, which creates a lower bound for the price of gold and has a
moderating effect on the volatility of gold’s price.
In Paul Krugman’s article on why he is a crypto skeptic, he explained that Bitcoin is
not “tethered” to the real world like gold.42 Since there is no real-world
market that has demand for Bitcoin, the price of Bitcoin has no lower
bound, and therefore, Bitcoin can never ascend to the role of money.
However, Saif answers Krugman’s critique with a quote from Theory of Money
and Credit by Ludwig von Mises,
“The significance of adherence to a metallic-money system lies in the freedom
of the value of money from State influence that such a system guarantees.
Beyond doubt, considerable disadvantages are involved in the fact that not
only fluctuations in the ratio of the supply of money and the demand for it,
but also fluctuations in the conditions of production of the metal and
variations in the industrial demand for it, exert an influence on the
determination of the value of money.”43
As Saif explains, fluctuations in the demand from industry cause gold’s value to
fluctuate and prevent it from being a purely monetary asset that reflects monetary
demand only. He says that gold is not money because of its industrial activity.
Industrial activity is secondary in the determination of the value of gold. For Mises,
a money that has only a monetary demand will be a superior form of money
because the value of money will be based purely on time preference.
According to Saif, in a situation where Bitcoin becomes the only money in the
world, hypothetically speaking, then the demand for Bitcoin is just the demand for
cash balances. In other words, Bitcoin demand is a reflection of time
preferences.
Mark Valek, author of The Crypto Research Report and fund manager at
Incrementum, compares Saif’s idea with the “reservation demand with gold”. The
volatility of gold, due to this reservation demand, will probably always
be lower than Bitcoin as long as Bitcoin is only a store of value and only
potentially has monetary demand. However, in the future, if hypothetically a
majority of people adopt Bitcoin as unit of account, the volatility would be lower
than gold because Bitcoin would be the denominator of goods and services. In fact,
—
42 See “Transaction Costs and Tethers: Why I’m a Crypto Skeptic,” Paul Krugman, The New York Times, July 31,
2018.
43 See “The Theory of Money and Credit”, Ludwig von Mises
“A However, loose monetary
practices and overly
bureaucratic regulation of the
financial industry have caused
people to look for alternatives. A
traditional one for savers is gold,
but it is unsuitable for payments.
Now, many see an opportunity
for cryptocurrencies to meet this
need.
Princess Gisela von und zu
Liechtenstein
38
Twitter: @CryptoManagers
if one starts using Bitcoin to measure goods and services the volatility would go to
zero, like during a gold standard.
Saif explains, “That is the idea of the stock-to-flow because, with gold, and
especially silver, yearly mining production does not significantly impact total
above ground supply compared to other metals. You want your money to be
purely your money.”
Mark compares the predetermined stock-to-flow ratio of Bitcoin with other rule-
based monetary policies, such as Milton Friedman’s automated k-percent rule44
and John Taylor’s Taylor Rule, that attempt to stabilize the purchasing power of
money over time. On the other hand, these attempts do not achieve long-term
sustainability because of political tension explained by Gordon Tullock and the
Public Choice literature on economics.
However, Saif does not believe that the k-percent rule and Bitcoin’s algorithm are
equivalent. “The key thing for me is that the value of money should be
determined by the market for money, which is the supply and demand
for cash balances.” The supply and demand for money are what determines the
price and the interest rate for money. It is very different from the rule-based
monetary policies because they want to calculate the right price, and then
they want the market to adjust.
While discussing the topic of Bitcoin with Larry White, he argued that gold has an
advantage over Bitcoin because its supply is elastic in the long run. Gold supply
increases by 1–2 % every year and inflation compounds. Within a 40 to 50 years,
the supply of gold will double. However, Saif couldn’t disagree more. According to
him, what makes gold a good money is the fact that it has the least
supply growth. Larry White is a supporter of fractional reserve banking on top of
a gold system because he holds that a fully backed gold standard would have a
shortage of money. Therefore, for Larry White, the reason gold became an
international money is because of the small 1–2 % in inflation every year. In
contrast, Saif says, “Gold wins out because the demand for money is always a
demand for a money that can be inflated the least. The demand for money
is always growing and the value of non-inflationary money always grows in the
long run. If we follow Larry’s argument, then we have to ask why did silver or
copper not become money instead of gold since they have supplies which are more
elastic to demand?”
—
44 See A Monetary History of the United States, 1867–1960.
“The virtues of the blockchain is
that it would be that it’s peer-to-
peer settlement – no centralized
settlement, no manipulation…
And most importantly, there’s
nothing to capture. It’s consensus
based. It’s stateless.”
Patrick M. Byrne
39
Twitter: @CryptoManagers
Can a Deflationary Monetary System Work?
Mark Valek gets right to the point and asks, “Does the monetary system need
inflation at all?” Some gold proponents would argue that the monetary system
needs some monetary inflation to keep up with population growth. Saif claims the
following: “From a mathematical point as well as from the perspective of a Bitcoin
maximalist, I think the argument against inflation is quite strong as outlined by
Philipp Bagus’ book on deflation45: the hardest form of money is one with
constant money supply and zero elasticity.”
Demelza Hays, author of The Crypto Research Report and fund manager at
Incrementum, mentioned her 2017 Forbes article based on the work of Professor
Dr. Antal Fekete. She posited the question to Saif, “For me, it looks like we want to
have a currency with a high stock-to-flow ratio, but if we take to the logical
conclusion, why do we need money that has any flow at all?”
“We don’t need any flow! But we also don’t know any other economic
good that is more reliable at limiting flow other than Bitcoin, which has a
small annual inflation rate still. The government will make more fiat
money flow, the miners of gold will make more gold flow, the miners of
silver will make more silver flow. If you could find a way to make a
money that doesn’t have any flow, then go for it! That is what Bitcoin will
be doing in about 100 years from now.”
Saifedean Ammous
The Current Monetary System is Debt-Based
Mark Valek holds that central banks follow inflationary monetary policies and
governments support inflation when the monetary system is debt-based. “If we
have debt as the basis of our money, that requires an ever-increasing money
supply. Otherwise, I don’t know where the interest for the debt should
come from. Do you agree with that?”
“Yes, I definitely agree on that,” answers Saif. “I go even farther than most
Austrian economists. In a free market for banking, depositors would not
earn any interest on their deposits because the money would be
appreciating in value, which is the real return. Essentially, lending money
to the bank enables depositors to save on the cost of securely storage money. The
second kind of money would be the direct equity and that is the model
of Islamic banking, which is also the model of traditional banking. If you are
going in on an investment, I think what it comes down to is what society accepts to
be legitimate. If a society accepts that it is ok for the government to impound the
—
45 Bagus, P. (2015). In Defense of Deflation. Springer.
“The hardest form of money is
one with constant money supply
and zero elasticity.”
Philipp Bagus
“Some of the most important
technological, medical, economic,
and artistic human achievements
were invented during the era of
the gold standard, which partly
explains why it was known as la
Belle Epoque, or the beautiful
era, across Europe.”
Saifedean Ammous
40
Twitter: @CryptoManagers
property of the borrower if they can’t pay back, then effectively you are monetizing
the property of the borrower, which is the collateral. Thus, you are effectively
monetizing the collateral. Interest lending carries collateral that can be impounded
and repossessed by the bank. Effectively, it makes the certain asset monetized
because you have issued a loan backed by that asset which is not money, it is a
house or car or a piece of land. That kind of business model is only accepted in
places when it is fine for the government to impound that property when the
borrower defaults. On the other hand, if the borrower’s collateral cannot be
impounded, then lenders often reject these kinds of deals and banks do not engage
in them.
Figure 11: Are US Equities indicating the next Recession?
Source: Yahoo Finance, Incrementum.
In a world where banks can only lend deposits or invest in direct equity and they
cannot repossess collateral, then the bank cannot make guarantees obviously,
because there is always a risk in business. Since the bank cannot create money
from fractional reserves and must first bring in money deposits from clients, they
cannot guarantee the solvency of their depositor accounts. So, the depositors are
accepting unlimited downside of complete default of the bank, and the bank is
asking them to accept limited upside. So, the notion of interest without risk
of default is untenable in that kind of world. Nobody would put their money
with someone who tells you,
“It is often in a country’s long-
term interest to give up political
control over its currency.”
Princess Gisela von und zu
Liechtenstein
0
2B
4B
6B
8B
10B
12B
1970 1980 1990 2000 2010
0
500
1000
1500
2000
2500
3000
S&P 500 Index (USD) Volume (USD)
41
Twitter: @CryptoManagers
“If we lose, you lose all your money and if we win you only get 3 %.
Consequently, everybody would go into equity investments. Either you put
money into a bank as a deposit available for maturity in which case you pay
the bank a fee for the storage and for making the money available for you. Or
if you have money that you are willing to sit on, you invest it as equity in
some other business and it is the job of the bank to match maturities between
the borrowers and the lenders.”
Saifedean Ammous
Although, Mark Valek does not agree with Saif 100 %, he thinks that in addition to
full deposits and equity investments there will also be demand for debt
instruments or deposits. “I think also in a zero-inflation monetary system there
would definitely be demand for investments not only in equity but also in debt. A
differentiated capital structure of a company enables different payout
characteristics for investors. Low returns on bonds or also lending accounts at
banks, enable the investor to receive predictable cash flows with higher seniority in
case of bankruptcy. It’s important to note that these would not be riskless
investments.”
However, in this monetary system, investors would not necessarily need to risk
their Bitcoin in a security investment, such as stocks or bonds, but they would still
experience an appreciation of the currency in form of a real increase in the
purchasing power of money. If investors do lend out Bitcoin to a bank or financial
intermediary who pools the risk of their borrowers, then the bank should pay a fee
to the depositor for accepting counterparty risk.“ So, there may be a case for such a
thing as a low-risk interest rate investment but probably the tendency would be
much lower to take this kind of risk. This is just a minor disagreement,” Mark
adds.
Table 2: Bank Account Options Under a Global Bitcoin Standard.
Bank Account Options for Depositors Saifedean
Ammous
Mark
Valek
Full reserves available on demand – depositor pays bank/depositor for storage and optionally
insures deposit. Investor earns from appreciation of currency over time.
Depositors invest directly in equity. Investor earns positive or negative return and owns equity
shares.
Depositors deposit money in bank in a certificate deposit or bond. Bank pools borrower risk
and lends matched maturity loans. Bank pays yield to depositor.
Source: Saifedean Ammous Interview, Incrementum AG.
Mark responded to the full reserve argument with the common critique posited by
mainstream economists, “Will a deflationary monetary system hamper
growth like the Keynesians claim?” Mark holds that a debt-based monetary
system needs inflation in order to stimulate research, development, expansion, and
intervention. However, under the classical gold standard, capital markets still
existed. Even though there was some kind of gold flow or inflation, the productivity
was higher than the inflation rate of gold.
“For something to assume a
monetary role, it has to be costly
to produce, otherwise the
temptation to make money on the
cheap will destroy the wealth of
the savers and destroy the
incentive anyone has to save in
this medium.”
Saifedean Ammous
42
Twitter: @CryptoManagers
Saif on Investing in Bitcoin
Question: What do you think about smart contracts and utility
tokens that can facilitate decentralized capital markets?
Answer: Bitcoin is all we get, we have to learn to accept it.
Question: If you were to create a cryptocurrency fund, would you
allocate 100 % of the portfolio to Bitcoin?
Answer: I would not create a cryptocurrency fund,
because the only cryptocurrency investment you need is
to just hold the Bitcoin.
Question: What are your thoughts on how to make an initial
investment in Bitcoin? Would you buy with cost-averaging over
time or would you put your entire investment in the market at
once?
Answer: Bitcoin is a highly risky asset. I would not advise
putting a lot of money into it. I always have to keep telling
people, this could still blow up. It has only been around
for 10 years. Bitcoin might not work, or it might go
through a bear market for another 10 to 20 years. Even in
the best-case scenario, Bitcoin will be highly volatile, and
it is going to have some massive drops. Among
cryptocurrencies, I think that Bitcoin is the only one that
might stay as a long-term hedge against monetary
inflation.
“Yes absolutely,” Saif believes. “In order to create interest in a debt-based system,
the bank monetizes the collateral, and in order to run fractional reserve banking, it
allows a central bank to create money and a fractional reserve system would
be unstable without a central bank. The central bank can become more
inflationary by manipulating interest rates downwards, which enables the
government to borrow and spend more. There are different layers of inflation, and
the key is to create parts of the economy that are dependent on this credit money.
They end up with all these industries and all these people employed because of that
money; they are politically connected, and they need to keep that money going.
This is a bug, not a feature, you would want to get rid
of that, you would want to make it that there is no
money creation going on so that investments have to
come from real saving. In this case, you would have
an actual functioning capital market. Maturity
matched.”
A Free Market for Money
Transitioning to the future outlook for the money
market, Demelza asked, “If all the central banks
around the world respond to Bitcoin by decreasing
the flow of their currencies and making their
currencies harder, do you think that Bitcoin and
central bank-issued fiat currencies will
compete alongside each other like Uber and
taxies or Airbnb and hotels? Or do you think one is
going to completely substitute the other?”
Saif’s answer: “For the first time, people have
an alternative; they can opt out of central
banking. This was not possible before Bitcoin,
but it is possible now. Bitcoin will limit the ability
all these government from inflating. You can imagine
Bitcoin developing a so-called monetary Batman
that is hanging in the shadows of every central
bank and is waiting for that central bank to
begin inflating the money supply, and then
people in that country would jump into
Bitcoin. When they jump to Bitcoin, its value will
significantly appreciate.
Saif thinks it is good to think of Bitcoin as a small side bank account
that you have for a rainy day. He said, “The important thing is that you may be
stuck in a country one day where you got robbed, you don’t have access to your
bank account, and you do not have money. If you have Bitcoin, you can get out of
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Twitter: @CryptoManagers
trouble by buying an airline ticket with it. I think it is important to
understand the value proposition.”
Mark echoed Saif. “We are very much on the same page because, even though we
are optimistic, I think that from a portfolio point of view investors do not have
to allocate a huge amount to have an impact. Investors can allocate a low-
digit percentage, even as low as 1 percent of their entire net wealth, and it
will have a huge impact if Bitcoin monetizes. Mark explains that Bitcoin is a
binary investment. Either Bitcoin becomes some kind of monetary asset and store
of value, or Bitcoin will be succeeded by something else and the price will go to
zero.
Bitcoin: Two Paths to Monetization
If we muse about the future, how will the transition from being a store of value to a
unit of account look for Bitcoin? Mark Valek considers two scenarios:
Positive scenario: Bitcoin becomes a reserve asset for central banks. A
domino effect could prompt more nations to buy Bitcoin to protect
against speculative attacks and to ensure that public debt can be paid off
with investments in Bitcoin. The Marshallian Islands already have
investment in Bitcoin, and the Central Bank of Barbados wrote a paper
on the topic in 2015.
Negative scenario. Loss of confidence in the fiat system, and there will
be a huge rush into the new safe haven being Bitcoin.
On the other hand, Saif sees a scenario in which Bitcoin ascends into monetary
supremacy by each person slowly transitioning to Bitcoin. “Just a monetary
upgrade. Install healthy software on a crappy windows PC, and it starts functioning
better. The monetary system that we have creates money when debt is
created. The flipside of that is that it destroys money when debt is paid off. We
have had this sort of system for the past 40 to 50 years, and now we have another
alternative, and everybody will jump into this new system (Bitcoin). Eventually,
people can use Bitcoin to pay off their fiat debt. If we just keep paying off our debt,
an orderly unwinding of the global monetary fiat system will ensue. Basically,
everyone pays off all of their debt and the money supply contracts until
it drops to zero, and then a new monetary system that is functional takes over
the world. It might be slow or quick, but it doesn’t have to be messy and ugly.”
“Government money is similar to
primitive forms of money and
commodities other than gold, in
that it is liable to having its
supply increased quickly
compared to its stock, leading to
a quick loss of salability,
destruction of purchasing power,
and impoverishment of its
holders.”
Saifedean Ammous
We are leaders of change in the finance industry. It is our vision to make crypto assets as accessible as the stock market and
facilitate exciting new crypto ventures.
+41 44 512 7507 GENTWO Digital AG | Crypto Valley LabsDammstrasse 16 | CH-6300 Zug [email protected] www.g2d.io
Securitization of all crypto assets.
Making Crypto Assets Bankable
We make any token, ICO, STO, crypto asset or crypto portfolio investable, fully bankable and transferable in a Swiss Security (Swiss ISIN)
The crypto asset industry set out to challenge the traditional finance sector. Talent, ideas, and capital flocked to crypto assets yet for
many investors, access remains a challenge.
Seed capital was earmarked for these new opportunities but the majority of funds remains trapped in the old system.
Banks, large scale/ institutional investors are missing out.
We are the bridge between these two worlds.
Institutional
Requirements for an
Investible Crypto Index
“Creating an index that accurately tracks the market requires consideration of three main factors: reflecting
market dynamics, maintaining/governing the respective rules, and preventing manipulation.”
Patrick Valovic
Key Takeaways
Indices that act as benchmarks must be investable and replicable.
In order for institutional investors to be able to invest, crypto currencies must be able to be
held in custody by professional custodians.
The LY Incrementum Krypto Index takes into account the requirements of institutional clients
with regard to investability and replicability.
Authored by LIMEYARD
LIMEYARD is a Swiss index provider with offices in Zurich, New York, and Vienna. LIMEYARD focuses on both
proprietary and nonproprietary indices and combines cutting-edge index innovation with a state-of-the-art cloud-
based technology. Its fast-growing family of global equity and cryptographic assets indices is rules-based,
compliant, traditional, and provides smart-beta investable solutions for institutions on the sell side and on the
buy side. LIMEYARD entered into a joint venture with Wiener Börse AG in February 2018.
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Twitter: @CryptoManagers
Creating a Benchmark for a Premature Market
The complex cryptoasset market environment inspired a joint innovation between
LIMEYARD and Decentriq, two Swiss-based companies. They combined their
expertise to develop a comprehensive cryptoasset index aimed at capturing the
dynamics of the overall cryptographic assets market whilst dealing with unique
regulatory and economic challenges embedded in this premature market. For
investors, an index must be tradable, meaning that liquidity and rebalancing are
feasible. Furthermore, the cryptographic assets market presents specific challenges
regarding regulatory requirements, such as the exclusion of investments in
privacy coins or coins that are only traded on one exchange.
Active asset managers typically use a benchmark to measure
the performance of their portfolio in relative terms. They assess
market efficiency and price systemic risks using benchmarks. Prior to
setting up a fund strategy, asset managers apply various risk models and
compare the past performance of the strategy against the underlying
benchmark, long-term outperformance being their aspired goal. The
benchmark itself is performance-agnostic.
Passive asset managers (e. g., ETF providers), on the other
hand, invest into a portfolio which tracks an index. Their
underlying question is: what new strategy, theme, region, sector, etc.
could be a great investment opportunity for investors? The ETF provider
simply tracks a factor/risk model-based index, e. g., a low volatility index,
a momentum index, a quality index, etc.
For active and passive managers, “tracking the market” has the same meaning;
however, for the latter, the index concept reflects an investment strategy. In other
words, active managers use the benchmark to track the market as a whole, and is
therefore performance-agnostic, as long as the performance is in line with
the overall performance of the market. On the other hand, for passive investors
the index represents an investment strategy with the clear ambition to
achieve long-term positive performance. In both cases, the index is rules-
based, meaning it’s not subject to discretionary decisions.
Creating an index that accurately tracks the market requires consideration of three
main factors: reflecting market dynamics, maintaining/governing the
respective rules, and preventing manipulation.
Reflecting market dynamics: This requires compliance with data
sufficiency, as data are the main ingredient of every benchmark.
Insufficient availability of data bears the risk of not adequately
representing a market.
Maintaining/government rules: To be fully rules-based and
transparent, the methodology of an index has to be applicable under all
market circumstances avoiding the necessity for a discretionary
interference.
“Virtual Currencies may hold
long-term promise, particularly
if the innovations promote a
faster, more secure and more
efficient payment system.”
Ben Bernanke,
14th chairman of the Federal
Reserve
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Twitter: @CryptoManagers
Manipulation prevention: Internal operational processes have to be
designed to prevent index manipulation (last experienced with the
LIBOR scandal in 2011). IOSCO, the international body of the world’s
security regulators, defined the IOSCO Principles for Financial
Benchmarks, consisting of 19 principles for index providers to adhere to,
all of which are implemented in LIMEYARD’s governance structure and
audited on an annual basis.
The Creation of the LIMEYARD Cryptoasset Index (LYCAI)
LIMEYARD and Decentriq faced two main challenges when creating a
comprehensive cryptographic market index: How to handle (1) a highly dynamic
market with numerous, partly unknown factors influencing its overall development
and (2) practical requirements of a benchmark that make the index rules-based,
transparent, and compliant. The result of this challenging endeavour is the
LIMEYARD Crypto Assets index (LYCAI), consisting of the largest 20
cryptoassets that are publicly tradable.
Figure 12: Index Performance LYCAI vs. Bitcoin.
Source: LIMEYARD.
To be part of the LYCAI, an asset has to fulfil several parameters to ensure
sufficient robustness, liquidity, and tradability. The index is calculated in real-
time 24/7, using trading data from eight different exchanges. The
aggregation over several trusted exchanges improves robustness against exchange-
level failures and price manipulations, providing an adequate representation of the
underlying market. The selected exchanges have, among other things, a
comparably high monthly liquidity. LIMEYARD is only considering assets that are
traded on at least two trusted exchanges. This ensures that, if one exchange
experiences any technical issue, the index can continue to pull price data on the
full predefined set of assets. The price data aggregation algorithm factors in both
volumes and outliers, reducing undesired spikes in the index level which could
happen in a young and fragmented market. Additionally, only the assets that are in
the top 60 % in terms of trading volume are eligible for inclusion in the index.
“There are three eras of
currency: commodity based,
politically based, and now, math
based.”
Chris Dixon
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Twitter: @CryptoManagers
The index considers only those assets whose protocols are not designed to enable
anonymity, avoiding the risk of being associated with illegal transactions and
maintain a certain degree of transparency for taxation purposes. With this
criterion, LIMEYARD and Decentriq anticipated concerns by regulators and aimed
to limit the infringement of KYC/AML standards when using the LYCAI as an
underlying for financial instruments. To provide diversification and compensate
the high skewness of the market through Bitcoin, the index smoothes each
constituent’s market capitalisation by an exponential moving average over the
month prior to the relevant review date. The weights are then derived from a
sigmoid function which penalises high values without imposing a hard cap.
As a result of the weighting methodology, an allocation of large assets is well-
balanced compared to other indices. For instance, Bitcoin and Ethereum’s weight
as of the end of October 2018 corresponds respectively to 39.30 % and 17.80 %
compared to more than 60 % and 13 % for the Crypto Market Index 10 and 30 %
(cap) and 23.46 % for the Bloomberg Galaxy Crypto Index.
Figure 13: LYCAI Asset Allocation November 2018.
Source: LIMEYARD.
The LYCAI index is the true benchmark for measuring fund performance by
cryptographic asset managers. The index meets all IOSCO requirements and the
regulators’ current concerns that they have explicitly stated regarding cryptoassets.
Incrementum Investible Cryptoasset Index
Different clients have different requirements. For this reason, we
tailored the LY Incrementum index to Incrementum’s requirements.
The LIMEYARD Crypto Asset Index is the basis concept for the LY Incrementum
Index, with the following deviations:
Coins in the index must be able to be stored in cold storage using
hardware in order to be insured by Swiss insurance companies.
Coins must have market capitalisation of more than $500 million.
The number of assets is fixed at ten in order to reduce rebalancing
transaction costs.
“Well, I think it is working. There
may be other currencies like it
that may be even better. But in
the meantime, there’s a big
industry around Bitcoin. —
People have made fortunes off
Bitcoin, some have lost money. It
is volatile, but people make
money off of volatility too.”
Richard Branson
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Twitter: @CryptoManagers
Figure 14: Index Performance LYCAI vs. Incrementum Index
Source: LIMEYARD.
This slightly revised index concept proves to be very solid resulting in a one-year
return of 16.10 % compared to LYCAI’s 0.58 % one-year return. The one-year
annualised volatility is 96.49 % compared to LYCAI’s 97.06 %. The one-year
volatility is, of course, mainly driven by Bitcoin, the largest asset in both indices.
The lower number of assets in the LY Incrementum Index makes the index more
tradable compared to the 20 assets in the LYCAI, which is designed to primarily
represent the overall crypto market.
Final Remarks
The Bitcoin market is entering a more mature state. Relevant markets are
regulated (e. g., CBOE) with rules designed to prevent potential manipulation.
There is a steady growth of Bitcoin futures traded on the CME platform to
currently more than $162 million average daily volume (ADV). Various leading
investment banks and traditional exchanges run internal projects to further evolve
the maturity not only of Bitcoin, but also of other large cap digital assets. Many
projects have already been announced, others are expected to be announced very
soon. That’s why LIMEYARD continues to invest into strategic partnerships and
the development of a broader crypto index family, also covering investment
strategies for the passive asset management segment, derived from its leading
LIMEYARD Crypto Asset Index methodology.
“PayPal had these goals of
creating a new currency. We
failed at that, and we just
created a new payment system. I
think Bitcoin has succeeded on
the level of a new currency.”
Peter Thiel
Equity Tokens
“Fractional ownership is not unique to blockchain, in fact, it’s not even unique to this century. Joint ownership dates
back to the Roman Republic, or the Dutch East India Company in more modern times. However, some assets
classes such as commercial real estate and fine art continue to be characterized by high unit costs.
A typical retail investor cannot harness the resources required to buy a Manhattan high rise. The investor is left
with two options: (1) Forego exposure to Manhattan commercial real estate in their investment portfolio, or (2)
gain exposure through an intermediary, for example a publicly traded Real Estate Investment Trust (REIT), where
it is often bundled with a portfolio of other buildings of varying quality and characteristics. Security tokens offer an
efficient path to fractionalize a single high value asset.”
Stephen McKeon, Professor University of Oregon
Key Takeaways
Equity tokens enable companies to raise equity using blockchain technology without locking up
investors.
Issuers of securities tokens are seeking to access the large pool of institutional money that has
not yet penetrated the crypto currency market. Institutional investors expect KYC/AML, data
protection and see a hurdle in one of the core elements of the blockchain, namely its
immutability.
In 2019 there will be a race between stock exchanges, which can offer the first regulated market
for securities tokens.
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Twitter: @CryptoManagers
The Austrian Financial Market Authority approved the first financial
prospectus for a fully regulated tokenized security in the European
Union in late November. The Financial Market Authority in Liechtenstein
already approved Liechtenstein’s first security token in August. Mt. Pelerin,
Tokenestate, and Securosys are also purportedly offering security tokens in
Switzerland. This means that a cryptocurrency can represent legal ownership in a
company or can represent other securities, such as certificates and bonds, if they
also register as a security. Unfortunately, there are no cryptocurrency exchanges
that are licensed to trade security tokens. However, equity tokens are not for the
standard cryptocurrency investor. Instead, equity tokens are trying to
access the large pool of institutional money that has not entered the
cryptocurrency market yet.
Institutional Money-Steering Innovation
The public blockchain technology reduces the cost of raising capital, and this
matters for small firms. One of the main benefits of trading digital assets on the
public blockchain infrastructure is that anyone can issue a digital asset, and
anyone can invest in a digital asset. This saves immense amounts of time and
money for issuers who no longer need licenses, underwriters, or lawyers. The large
cost of listing a company on a stock exchange erects barriers to entry for small and
medium-sized enterprises (SMEs). The blockchain also removes the barriers to
entry posed by regulations that limit investment possibilities for retail
investors like grandma.
In addition to enabling financial inclusion in the market, the public blockchain
technology allows investors to trade “shares” of companies for much lower
fees with instant settlement times. This means significant savings for retail
investors and smaller profits for stock brokers.
However, some investors, especially institutional investors, want features of the
traditional capital market to be incorporated into the token market. Enter
“Security Token”. Over the past few months, the term “Security Token Offering”
(STO) has been growing in importance compared to initial coin offerings. There
are three main problems institutional investors have with the Wild West of
blockchain:
Not all cryptocurrencies follow the laws such as know-your-customer,
anti-money laundering, sanctions, etc.
Large investors want privacy. They do not want transparent blockchains
that allow outsiders to see their transaction amounts and destinations.
Immutability. Public blockchain cryptocurrencies are impossible to
retrieve if a private key is hacked or lost. Large investors will not want
their shares of Visa stock being controlled by a private key. Instead,
cancel and reissue features will be required before the security token
market can gain adoption.
“Blockchain with improved
scalability will increase
efficiency in many areas:
logistics and supply-chain
control, healthcare, public
administration (for land, car and
company registries), smart
contracts and more. In the
financial industry, it might
replace some banking functions,
such as payments, custody and
accounts – even independent of
cryptocurrencies.”
Princess Gisela von und zu
Leichtenstein
“Just as it got easier to use
email, it will be easier to use
Bitcoin as people invest in it
and become more familiar with
it.”
Gavin Andresen,
core developer of Bitcoin
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Twitter: @CryptoManagers
In order to manage these concerns, several companies are working on private
blockchains that will allow equity tokens to be stored and traded. The Swiss stock
market’s Swiss Digital Exchange (SDX) near Sihlcity is working on a pilot project
that wants to tokenize four main groups of assets.
First, native tokens for SMEs that only exist on SDX will be issued,
stored, and traded.
Second, tokenize existing securities on the SIX Swiss Exchange.
Third, tokenize non-bankable assets.
Fourth, tokenize cryptocurrencies, such as Bitcoin and Ethereum.
In addition to SDX, Daura, a partnership between MME and Swisscom, is also
working on a private blockchain. Blockchains specifically designed for trading
securities will have KYC/AML integration, privacy, and cancel and reissue features
that allow the stock exchange owner or broker to reissue shares to companies that
lost their private keys or were hacked. Blockstream’s LIQUID and Polymath are
also both examples of blockchains targeting the security market. However,
important legal issues, such as whether or not tokenizing a fund violates fund
distribution rights, still need to be answered.
Figure 15: Public Security Token Platforms Performance.
Source: Incrementum
Define Token and Security
A token is a digital representation of value on a particular distributed
ledger. Tokens can represent voting rights, ownership shares, bonds, and much
more. ERC 20 smart contracts on the Ethereum Blockchain and NEP5 smart
contracts on the NEO blockchain are currently being used to pay out company
dividends and vote on managerial decisions. On the other hand, the definition of a
security differs from jurisdiction to jurisdiction. In the US, a financial product is
legally classified as a security if the four following criteria are met:
“Liechtenstein is likely to be a
pioneer, advancing pragmatic,
innovative regulation and
supervision for cryptocurrency
transactions and ICOs.”
Princess Gisela von und zu
Liechtenstein
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Twitter: @CryptoManagers
Investment of value
With an expectation of profit
In a common enterprise
With the profit to be generated by a third party
As mentioned in the next chapter, these criteria came from the 1946 Supreme
Court case between a Florida citrus grower named Howey and the Securities
Exchange Commission. In response, US cryptocurrency issuers are applying for
Reg D. and Reg S. exemptions from security law. They are also exploring how
Airdrops can circumvent security law.
However, Europe does not have any concept of the Howey test. This is
because the US has common law where court cases set precedents for future
judgements. In contrast, mainland Europe has civil law, which is a principle-based
approach to law. According to Article 2 let. b FMIA in Switzerland, a security is
defined as, “standardized certificated and uncertificated securities, derivatives and
intermediated securities, which are suitable for mass trading.” Subsequently,
FINMA has already reported that many cryptocurrencies are
securities.46
Should I Tokenize or Securitize or Both?
Tokenization of assets existed before cryptocurrencies were created.
They are called certificates. However, certificates cost money to set up and
maintain. Unlike issuing an ERC token on Ethereum, certificate issuers must have
a business structure that can legally issue structured products, and often
certificates are limited to qualified investors. According to the Swiss Collective
Investment Schemes Act (CISA) of 2006, a qualified investor is one of the
following47:
Supervised financial intermediaries (such as banks, securities dealers
and investment fund managers)
Supervised insurance companies
Public law institutions and pension funds with professional investment
operations
Business enterprises with professional investment operations
Wealthy private persons (German: vermögende
Privatpersonen) with CHF 2 million worth of financial assets,
and direct real estate investments do not count!
—
46 See Wegleitung für Unterstellungsanfragen betreffend Initial Coin Offerings, FINMA, February 16, 2018.
47 See “Qualified Investors,” Swiss Fund Data AG, 2018.
“There will be many types of
assets codified into the
blockchain, and they are all not
just going to be on the Bitcoin
blockchain – it’s going to be a
number of different assets here.
And the best way to invest in that
is a diversified portfolio.”
Olaf Carlson-Wee
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Twitter: @CryptoManagers
Investors who have a written asset management agreement with a
supervised bank, securities dealer or investment fund manager
One type of structured product is a certificate. A certificate can be a tracker
certificate that tracks the value of an asset, or a certificate can be
actively managed. The asset could be an IBM share or a cryptocurrency index,
or a physical plane, for example. Bank Vontobel, for example, creates many
certificates. A certificate is similar to a bond because it represents a predetermined
payoff promise that the issuer gives to the investor. This means that the investors
can read in the terms of conditions what they will get from the certificate when the
certificate expires. For example, the promise could be that “In two years you get
the performance of IBM shares.” However, certificates can be actively managed as
well. Actively managed certificates (AMCs) can contain any type of cryptocurrency,
including privacy coins, pre-ICO coins, and ICO coins. Investment managers can
also employ riskier strategies than UCITS or AIF can such as shorting and taking
leverage.
Certificates are like tokens in the sense that they can be used to
securitize anything. The only difference is that certificates contain normal
investor protections and they can be easily purchased through security brokers.
Since they adhere to existing regulations, they have certain costs. Therefore,
securitization of an asset using a certificate only begins to make sense for assets
worth over ₣ 10,000. Unlike UCITS and AIF regulated cryptocurrency funds, such
as Incrementum’s, structured products are exempt from the collective investment
scheme regulations.
Figure 16: SIX Assets Growth in Millions of Swiss Francs.
Source: SIX, Incrementum
“It’s bigger than the Iron Age, the
Renaissance. It’s bigger than the
Industrial Revolution.”
Tim Draper
2000 2005 2010 2015
0
1M
2M
3M
4M
5M
6M
Swiss All Shares Index SPI EXTRA Total Return Swiss Performance Index SPI®
SMI Expanded Total Return SMI MID Total Return Swiss Market Index SMI®
55
Twitter: @CryptoManagers
GenTwo Digital, a joint venture of GenTwo AG and
Inacta, is a Swiss consultancy firm based in Zug.
GenTwo Digital was founded by Patrick Loepfe, a
previous Vontobel Deritrade specialist, and the Vice
President of the Board or/and Managing Partner of
Forstmann, Philippe A. Naegeli. In an exclusive
interview with Patrick Loepfe from GenTwo, we
discussed the innerworkings of how securitizing a
cryptocurrency works. The company helps financial
intermediaries, high net worth individuals, and
family offices turn bankable assets, such as actively
managed accounts and structured products, and non-
bankable assets, such as art and cryptocurrencies,
into tradable certificates with Swiss International
Securities Identification Number (ISIN) numbers. An
ISIN number is code that uniquely identifies a
specific securities issue. In Switzerland, obtaining an
ISIN code for a security requires a prospectus, term
sheet, and offering memorandum. In traditional
finance, ISINs are used for stocks, bonds, funds,
hedge funds, mutual funds, and other securities,
whether for a private offering or going public with an
IPO (initial public offering).
What GenTwo does is build a financial company for
each investment manager, and then the investment
managers can issue multiple certificates within the
company. GenTwo’s issuing structure is a unique
dedicated issuance vehicle in Guernsey. Once
GenTwo sets up the special purpose vehicle company,
investment managers can build structured products
as they wish. The advantage of setting up a dedicated
issuance vehicle is that issuers can have balance sheet
control where liabilities are stored off the balance
sheet. Normally, issuers risk balance sheet risk from
holding assets on the active side and liabilities that
can be impacted from operational issues. Instead, an
SPV structure leaves only the assets on the active side
of the balance sheet and the certificates on the passive side. Since the certificate
tracks the value of the assets that are held on the active side, there is
almost no risk of a default. For example, Bank Vontobel has an SPV in Dubai
from which they issue their certificates. Julias Bär has a SPV in Guernsey, EFG has
a SPV in Guernsey.
Advantages and Disadvantages of Certificates vs. Funds
for Cryptocurrency Asset Managers
Advantages
First. Unlike Alternative Investment Funds, Guernsey
special purpose vehicles do not need to have external
custodians that have a bank license. Therefore,
investment managers can outsource cryptocurrency
storage to third party custodians like the companies
mentioned in “Crypto Concepts: Custody” in the
December 2018 edition of The Crypto Research Report.
Second. Lower fees. Since managers of Actively
Managed Certificates can execute trades with the
counterparties of their choosing and outsource
cryptocurrency custodianship, fees can be less than with
UCITS or AIF cryptocurrency vehicles that need to work
with banks and administrators.
Third. Time. SPVs take 10 business days to setup
and certificates take 3 business days.
Disadvantages
First. Cryptocurrency securities are not always invested
in the underlying cryptocurrency. They can just be
trackers. Investors should verify if the security is actually
invested in the underlying.
Second. Unless the cryptocurrency security uses a
licensed bank or third-party custodian that offers
insurance, most cryptocurrency holdings are uninsured.
Unlike alterative investment funds that have liable
custodians, structured products and managed accounts
can have a range of options from completely uninsured to
fully insured.
Third. Swiss Certificates are not always passportable to
the European Union.
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Twitter: @CryptoManagers
Certificates are not really competitors for tokens. Tokens can be issued by
retail investors and anyone in the world can invest in them. At Incrementum, we
suspect that one will not completely replace the other for the time being. Instead,
some market participants will choose to invest in the regulated world and other
market participants will choose to invest in the unregulated world. Many
companies will raise capital in both markets. As Oliver Völkel said during the
Crypto Christmas Market Outlook, the main problem with equity tokens is that a
licensed exchanged where investors can trade these assets does not exist. 2019
will be a race for the first legal platform that can trade
cryptocurrencies that represent securities.
Disclaimer: GenTwo is an official partner of the Crypto Research Report. None of
the information you read in this article should be taken as investment advice, nor
do the writers of the Crypto Research Report endorse any project that may be
mentioned or linked to in this article. Please do your own due diligence before
taking any action related to content within this article.
“One of the most powerful use
cases of blockchain technology
was to inscribe immutable and
transparent information that
could never be wiped from the
face of digital history and that
was free for all to see. Satoshi’s
choice first to employ this
functionality by inscribing a note
about bank bailouts made it
clear he was keen on never
letting us forget the failings of
the 2008 financial crisis.”
Chris Burniske,
author of Cryptoassets
Investment Banking
Driven by the power of possibility
vontobel.com
Legal Challenges for
Blockchain-Based
Capital Markets
“Blockchain technology can achieve what governments wanted to achieve for a long time: a fair, secure and
attractive capital market for start-ups, SMEs and investors.”
Christian Meisser, LEXR AG
Key Takeaways
Tokenization seems to be interesting for small and medium-sized enterprises, as the cost of
raising capital via tokens is sometimes lower than on the traditional capital market.
The regulatory classification of whether an issued token represents a security has far-reaching
implications and is of the utmost legal relevance. The assessment of whether a token is to be
treated like a security under supervisory law is fundamentally different in various
jurisdictions.
Authored by Christian Meisser, lic. iur., MBA, CEO of LEXR AG
Christian Meisser is an entrepreneur and lawyer with a focus on the intersection
between technology and law. He regularly speaks, publishes, and advises on
blockchain-related topics and is specialized in financial market regulation. After
working for some of the world’s top law firms, he founded the LegalTech company
LEXR AG with the vision of providing like-minded entrepreneurs with price-
predictable legal services that are tailored to the way companies operate and
innovate today. Photo: Christian
Meisser
59
Twitter: @CryptoManagers
Capital Flows to the US
Start-ups as well as small and medium-sized enterprises (SMEs) are praised for
being a driving force of economic growth. In principle, Europe offers excellent
conditions for growth, with a mobile and well-educated talent pool, a huge
domestic market, and modern infrastructure. Nevertheless, risk capital for start-
ups is scarce and promising start-ups move abroad. According to a press release of
the European Commission,48 in 2016 venture capital providers invested
only € 6.5 billion in the entire EU, just about one sixth of the € 39.4
billion invested in the US. According to the same release, only 26 European
companies were regarded as “unicorns” at the end of 2017 (unlisted
companies with a theoretical market capitalization in excess of $ 1 billion), while
109 such companies existed in the US and 59 in China.
Not only start-up funding but also financial market support for SMEs appears to
be lacking. One reason why start-ups are left wanting is widely considered to be the
lack of “exit” opportunities in the form of listings: in 2017, the number of European
IPOs of SMEs was still down 50 percent from the time prior to the financial
crisis.49
Figure 17: ICOs vs IPOs vs VC Funds raised (US).
Source: ICOdata.io, CBInsights, Incrementum
—
48 See “EU: €2.1 billion to boost venture capital investment in Europe's innovative start-ups” [press release],
European Commission, April 10, 2018.
49 See Building a proportionate regulatory environment to support SME listing [public consultation], European
Commission, 2017.
“The blockchain is the financial
challenge of our time. It is going
to change the way that our
financial world operates.”
Blythe Masters
60
Twitter: @CryptoManagers
With public markets for SMEs weak, venture capital firms hesitate to
invest in SMEs at all. While the EU tries to improve the situation with
subsidies, harmonization of capital markets and mild deregulation, the
world of start-up funding is fundamentally changing because of the blockchain
technology. The possibility of transferring assets directly between two parties
without intermediaries enables an enormous simplification of issuance and trading
of capital market instruments. Thus, start-ups raised $ 5.5 billion worldwide in
2017 by issuing tokens in the framework of ICOs – and this year the total amount
has already swelled to $ 14.3 billion.50
But not only primary markets (i.e., the initial issuance of ICOs) are thriving. Daily
trading volume in tokens in secondary markets amounts to several
billion USD.51 Thus, blockchain technology has already furnished impressive
proof of its application potential in capital markets. From the perspective of
investors, it was evidently worth the risk – according to one study, the average
return on investment on ICOs stands at 82 %.52 However, the legal design
of such tokens as this new technology emerges has received little attention so far
and investors rarely enjoy enforceable rights. The trend is clearly moving
toward issuance of so-called security token offerings: more and more ICO
teams want to tie tokens to enforceable rights, which provide token
owners with a legal position akin to that of shareholders. Thus, the vision
of a capital market in which start-ups and SMEs are able to access needed growth
capital without having to move offshore and which offers investors safe and simple
access to diversification opportunities is coming within grasping distance.
This article presents legal challenges for effective blockchain-based capital markets
in different countries by way of examples and in particular discusses the following
subjects:
Challenges posed by the classification of tokens in financial
market regulations
Legal preconditions for the issuance of security tokens
Legal framework conditions for trading in security tokens
Classification of Tokens as Securities
Classification of tokens within the existing framework of civil law is already quite
difficult and the opinions of legal scholars differ widely: for instance, in
Switzerland it is debated whether tokens are digital assets, contractual rights,
—
50 Figures according to Coindesk ICO Tracker, accessed September 19, 2018.
51 Figures according to CoinMarketCap, accessed September 19, 2018.
52 See “Digital Tulips? Returns to Investors in Initial Coin Offerings,” Hugo Benedetti and Leonard Kostovetsky,
SSRN, May 20, 2018.
“Blockchain technology isn’t just
a more efficient way to settle
securities. It will fundamentally
change market structures, and
maybe even the architecture of
the Internet itself.”
Abigail Johnson
61
Twitter: @CryptoManagers
or a special form of assets in their own right.53 This represents a difficult
task for regulators with respect to a legal assessment in terms of financial
legislation. Obligations under financial market regulations with respect to the
issuance and trading of tokens directly depend on their legal classification. For
example, if tokens are classified as securities54 under a specific legal order, public
offerings of such tokens without an appropriate prospectus may make
issuers liable to criminal prosecution. Accordingly, correct classification is
quite important, but it is anything but trivial: not unlike a blank sheet of paper,
tokens can be configured with any combination of rights and obligations, or in the
framework of smart contracts even with complex, automated processes. Various
countries are trying to meet this challenge in very different ways:
Figure 18: Google Trends - Security Token Offerings are Gaining
Interest
Source: Incrementum
The approach that has been historically established in US case law is based on
flexible rather than static principles, which makes it possible to adapt regulations
to the countless different possible designs.55 This is primarily based on the
Howey Test and the term security is tied to whether “an investment in a
common venture is premised on a reasonable expectation of profits to be
derived from the entrepreneurial or managerial efforts of others.” Whether there
is indeed “a reasonable expectation of profit” is sometimes questionable,
particularly in ICO projects which refrain from according any rights to investors.
Supervisory authorities can strengthen legal certainty by regularly publicizing
relevant rulings.
—
53 See “Verfügungsmacht und Verfügungsrecht an Bitcoins im Konkurs” ("Authority to dispose of and right to
dispose of Bitcoins in insolvency proceedings”), Christian Meisser, Luzius Meisser, and Ronald Kogens, Jusletter IT:
online, May 24, 2018.
54 The term security is used as an overarching term herein for all designations of a similar type used in different
jurisdictions, such as stocks/bonds or financial instruments.
55 See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO,
Securities and Exchange Commission, Release No. 81207, July 25, 2017
“Over the next decade, there will
be disruption as significant as
the Internet was for publishing,
where blockchain is going to
disrupt dozens of industries, one
being capital markets and Wall
Street.”
Patrick M. Byrne
62
Twitter: @CryptoManagers
The legal situation in the EU is more formal. The EU directive on markets for
financial instruments (better known as MiFID, or MiFID II) has largely
harmonized financial markets in the single European market; the term “financial
instrument” was defined in Annex I, section C. Unfortunately, it remains
essentially unclear under what circumstances a security token is
actually classified as a financial instrument. The definitions in the directive
refer to “old world” terms (i. e. before blockchain technology), which simply cannot
accommodate the plethora of possible designs associated with tokens. The Malta
Financial Services Authority has at least attempted to provide some clarity in the
form of a financial instrument test.56 Without practical examples, the
definitions nevertheless exhibit a degree of abstraction that leaves market
participants unsure if tokens are deemed to represent financial instruments in
view of the multitude of possible configurations.
The Swiss financial market supervisory authority Finma has decided on a
compromise in its ICO guidelines.57 Similar to the method adopted in the US, a
functional approach is used with respect to investment purposes. At the same time,
formal criteria are taken into account as well, and essentially every token that
represents an asset is considered a security token. Due to these
comparatively clear criteria and the possibility of asking Finma to provide
regulatory information on specific cases in advance, the legal situation pertaining
to various token configurations can be easily assessed in Switzerland.
The tokenization of traditional securities, such as stocks or bonds, is the easiest to
assess: The laws were written for these types of securities and issuers are unlikely
to face surprises with respect to tax consequences either. In order to prevent the
erection of inappropriate barriers to innovation in virtual worlds and the
tokenization of real assets, a restrictive application of the various terms
designating securities would be welcome. For example, if one were to tokenize
tickets to an event, such tokens may already be regarded as securities in several
countries: for one thing, a real asset is underlying the token, for another thing one
may well purchase event tickets for investment purposes, i. e. in the hope of being
able to sell them at a higher price at a later date. At the same time, it seems hardly
appropriate to having to issue a prospectus or to trade such tokens on a regulated
exchange.
Primary Market: Issuance of Security Tokens
From a technical perspective, the internet makes it easy to market token offerings
globally, and cryptocurrencies allow investors to buy tokens globally. Expensive
—
56 See Guidance Note To The Financial Instrument Test, Malta Financial Services Authority, July 24, 2018.
57 See Guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs), Finma, February
16, 2018.
“Bitcoin can be best understood
as distributed software that
allows for transfer of value using
a currency protected from
unexpected inflation without
relying on trusted third parties”
Saifedean Ammous
63
Twitter: @CryptoManagers
intermediaries such as investment banks are barely needed anymore. The rapid
growth of ICOs demonstrates that such a global capital market offers highly
attractive funding opportunities for companies. However, upon issuing security
tokens one is faced with a patchwork of national regulations. The most
important aspect in this context: potential prospectus obligations.
A prospectus is intended to provide investors with the information required to
make an investment decision. What information precisely has to be included varies
from country to country and ranges from (for the time being) a few pages in
Switzerland to almost book-sized tomes in the US. Prospectus requirements
in the EU are so demanding that small funding rounds are barely worth
the investment of time and money needed to draw up and publish a
company’s financial statements. As an illustration of the costs involved:
according to the Official Journal of the EU, the cost of drawing up an EU
prospectus for offers of securities to the public with a total consideration of less
than € 1,000,000 is likely to be disproportionate to the proceeds.58 And that is just
the prospectus for the EU. For every additional country in which tokens are to be
offered, one has to verify whether a prospectus needs to be published and/or has to
be reviewed by the local authorities.
Prospectus obligations may be limited or waived entirely below a certain threshold
and plans by a number of countries to raise such thresholds for prospectus
publication obligations have to be welcomed in this context (in the EU to around
EUR 8 million or in Switzerland to CHF 2.5 million). Further relief is to be
provided by various exemptions, such as thresholds on the number of investors or
the focus on professional or accredited investors. While prospectus obligations and
restrictions on distribution represent barriers to security token offerings, there
already exist numerous projects which are able to implement such offerings
successfully and with legal certainty. Along with growing interest, the required
know-how will spread in the marketplace and costs will be lowered further, not
least through the use of legal-tech software for drawing up documentation in
various countries.
Secondary Markets: Trading in Security Tokens
The most impressive efficiency gains are possible in trading. Thanks to smart
contracts, so-called decentralized trading platforms can be built, which enable
trading between two parties without any intermediaries or counterparty
risks. The assets to be traded are safely stored via the smart contract, and once the
required conditions are fulfilled, clearing and settlement takes place automatically
—
58 See “REGULATION (EU) 2017/1129 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on
a regulated market (prospectus directive 3),” European Union, Official Journal of the European Union, June 30, 2017.
“People didn’t know where they
could trade. When everybody
owes each other IOUs that can be
in multiple places at once, that’s
how the system couldn’t tell any
more who owned what and who
owed what to whom. Blockchain
could have prevented 2008.”
Patrick M. Byrne
64
Twitter: @CryptoManagers
on the blockchain. Infrastructure costs, such as centralized security depositories,
security settlement systems, or banks, and counterparty risks disappear. It is
simply not possible in such a system to be affected by a default such as that of
Lehman Brothers.
A sensible function that remains in place consists of match-making platforms
similar to those operated by stock exchanges or other trading platforms, which are
in particular aimed at efficient price formation and the prevention of market
abuse. From a regulatory perspective, risks, such as insider trading and market
manipulation, remain extant in the blockchain world as well, and modern-day
regulations are in essence applicable to trading platforms for security tokens. In
the meantime, both established exchanges such Switzerland’s SIX59 and
blockchain enterprises in a number of countries have made public announcements
regarding the development of security token trading platforms. As “old-world”
regulations remain applicable, a license is necessary, which has so far not been
granted in any (developed) country. Moreover, the focus of proposed or already
implemented blockchain-related legislation in various countries is on
cryptocurrency trading and on utility tokens – which has largely no effect on the
regulation of security token trading venues. Nevertheless, advisory practices and
press releases by numerous enterprises in the industry give cause for confidence
that trading venues for security tokens will be established shortly. After
all, for ICO teams the tradability of a token is an important criterion affecting its
design.
Final Remarks
The consummate ease with which tokens can be issued, transferred, and equipped
with automated payment functions could be the basis for an “internet of
finance” – a new generation of financial markets in which even the smallest
projects can quickly and safely obtain external funding without intermediaries.
Imagine for example a small bakery in a village which can get funding for a new
oven from its loyal customers by issuing a tokenized micro-bond with automated
interest payment features, or a movie project which automatically pays out a share
of its revenue to the community of fans that funded it with every download. The
indirect interaction between capital seekers and capital suppliers makes not only
large, global funding rounds possible but also promotes stronger relationships
between small investors and their local economy.
Moreover, a blockchain-based, decentralized trading system provides greater
stability and safety, as the absence of intermediaries removes potential points of
failure and middlemen whose incentives are not necessarily aligned with those of
investors. In order for this technology to achieve its full potential for creating an
—
59 See “SIX to launch full end-to-end and fully integrated digital asset trading, settlements and custody training” [press release], SIX Group AG, July 6, 2018.
“2016 has proven to be the year
where the most forward-thinking
financial institutions are actually
using blockchain technologies for
payments and settlement rather
than as an experiment”
Chris Larsen
65
Twitter: @CryptoManagers
attractive capital market for companies and investors, existing regulations have to
be applied with sound judgment and a sense of proportion. Luckily the legislative
pendulum is currently swinging toward deregulation again, and more and more
regulatory exemptions are planned, particularly for start-up companies and small
and medium-sized enterprises.60 However, in order to make it possible for
unicorns and already successful companies to obtain adequate funding in their
home markets, more than exemptions for small projects will be needed. In a
global financial market characterized by mobile talent, courage on the
part of regulators to open up and liberalize markets stands to be
rewarded.
—
60 See “Fact Sheet Frequently asked questions: Easier access to financing for smaller businesses through capital
markets” [press release], European Commission, May 24, 2018.
Cryptocurrencies.
The New Asset Class.
Regulated | Diversified | Liquid
Information about the fund strategy for professional investors (according to MiFID) only.
www.cryptofunds.li
**
About Us
The Team
The Report
As a sister report to the internationally acclaimed In Gold We Trust report, the Crypto Research Report brings the
same quality and rigor to understanding the cryptocurrency market. The Crypto Research Report is a report
produced by Incrementum AG.
The Company
Incrementum AG is an owner-managed and fully licensed asset manager & wealth manager based
in the Principality of Liechtenstein.
What makes us stand out in the asset management space? We evaluate all our investments not only from a
global economic perspective but also by taking into account global monetary dynamics. This analysis produces what
we consider a truly holistic view of the state of financial markets. We believe our profound understanding of
monetary history, out-of-the-box reasoning and prudent research allows our clients to prosper in this challenging
market environment.
**
In order to provide accurate information on the most important and recent updates in the crypto
space, a diverse team of thought-leaders, academics, and finance experts form our board of
advisors. The mission of our board is to stimulate discussion on the most pressing risks and opportunities in the
cryptocurrency market. Our advisors come from different countries, different education paths, and different
careers. However, they all have one trait in common: their avid interest in the blockchain technology and
cryptocurrencies. To stay up-to-date, the advisory board meets on a regular basis to discuss current affairs and the
next quarter’s outlook. All meeting minutes are posted as a transcript and released for free on our website at
www.CryptoResearch.Report. Our board members include:
Max Tertinegg
Max Tertinegg is the CEO and co-founder of Coinfinity in Graz. Since
2014, Mr. Tertinegg has worked with merchants, investors, and regulators in
Austria to build a cryptocurrency community. Currently, he is working on
cryptocurrency storage solutions that are affordable and easy to use.
Oliver Völkel
Based in Vienna, Oliver Völkel is a partner at StadlerVölkel Attorneys
at Law. He assists corporations and banks in all stages of capital market issuings
and private placements (national and international). His focus is on new means of
financing vehicles (initial coin offerings, initial token offerings) and drafting and
negotiation of cross-border facility agreements and security-documentation, also
in connection with cryptocurrencies and tokens. Mr. Völkel also advises on other
cryptocurrency related banking matters, regulatory matters, capital markets
regulation, general corporate, and corporate criminal matters.
Joseph Annuzzi Jr.
Joseph Annuzzi Jr is the founder and CEO of a stealth cryptocurrency
decentralized exchange and the sole inventor of a cryptocurrency
secret key protection algorithm designed for consumers. He is a
software architect and entrepreneur from Silicon Valley and an author of a series
of computer science text books published by Pearson Education, Inc. He also
works with crypto custody solutions.
Advisors
**
We sincerely want to thank the following friends for their outstanding support:
Our knowledgeable advisors including Max Tertinegg, Oliver Völkel, and Joseph Annuzzi Jr., the generous
authors who contributed to this report including Nikolaus Jilch, Christian Meisser, and Patrick Valovic. We are
also grateful to our wonderful research analysts Friedrich Zapke and Cristian Ababii.
Contact:
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Email: [email protected]
Disclaimer:
This publication is for information purposes only, and represents neither investment advice, nor an investment
analysis or an invitation to buy or sell financial instruments. Specifically, the document does not serve as a
substitute for individual investment or other advice. The statements contained in this publication are based on the
knowledge as of the time of preparation and are subject to change at any time without further notice. The authors
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Copyright: 2019 Incrementum AG. All rights reserved.
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